Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 12, Problem 1NP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Consider the following extended classical economy (in which the misperceptions theory holds):
AD
Y= 300 + 10
SRAS
Y=Y +P-p°
Full-employment output
Y = 800
Natural unemployment rate
u=0.04
a. Suppose that the money supply M = 1000 and the expected price level p° = 20.
%!
The short-run equilibrium value of output Y is 800, and the short-run equilibrium value of the price level P is 20.
(Type integers or decimals rounded to two decimal places as needed.)
The long-run equilibrium value of output Y is . and the long-run equilibrium value of the price level P is
(Type integers or decimals rounded to two decimal places as needed.)
QUESTION 7
Consider the following Taylor rule
i=0.02+0.5y+0.5(n-2% )
where y
is the percentage difference between the actual output and its full-employment level, while T is inflation over the last 12 months. The evolution of the economy is described by the following data:
Full-emp't output Actual output
Price level
January, 2050
February, 2050
March, 2050
100.00
100.00
100.00
100.00
101.41
99.52
100.00
102.31
104.71
April, 2050
Маy, 2050
June, 2050
100.00
101.31
102.58
100.00
100.10
99.64
100.00
101.89
100.07
July, 2050
August, 2050
September, 2050
October, 2050
100.00
100.55
100.71
100.00
100.83
99.20
100.00
99.75
98.40
100.00
99.95
101.82
November, 2050
100.00
98.54
98.83
December, 2050
100.00
97.52
98.68
January, 2051
100.00
97.43
98.10
According to the Taylor rune, in January 2051 the central bank must have set the interest rate at
Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that…
Assume that investment, government expenditures, taxes are autonomous.C = 2000 + 0.65* (Y-T)I = 900 – 50iG = 400T = 1500M = 1000P = 2L = 0.50Y-25ia.What is the value of the sensitivity money demand to the level of income?b.What is the value of the nominal supply?c.What expression represents the IS curve?d.What is the equilibrium interest rate, i*?e.What is the equilibrium income, Y*?
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- =0. An economy is described by the following equations: AD: SRAS: Okun's law: Y = 4000 + 2(M/P) Y = ybar + 100(P-P) (Y-ybar)/ybar =-2(u-ubar). Assume ybar 6000 and ubar=0.05. = A) Suppose that the nominal money supply has long been at M = 4000 and is expected by the public to remain constant forever. The equilibrium value of P is The equilibrium value of P is, The equilibrium value of Y is, The equilibrium value of u is The equilibrium value of x is, (2 points each) B) A totally unexpected increase in in the money supply occurs, raising it from 4000 to 5250. [Part B is for extra credit] The short run equilibrium value of P is The short run equilibrium value of Pe is_ The short run equilibrium value of Y is The short run equilibrium value of u is. The value of unanticipated inflation, which is defined as (P-P)/P, is, The value of the slope of the short-run Phillips curve is (2 points each)arrow_forwardQUESTION 7 Consider the following Taylor rule i=0.02+0.5y+0.5 (n- 2% ) where y is the percentage difference between the actual output and its full-employment level, while is inflation over the last 12 months. The evolution of the economy is described by the following data: Full-emp't output Actual output Price level January, 2050 February, 2050 March, 2050 100.00 100.00 100.00 100.00 101.41 99.52 100.00 102.31 104.71 April, 2050 Мay, 2050 100.00 101.31 102.58 100.00 100.10 99.64 June, 2050 100.00 101.89 100.07 July, 2050 August, 2050 September, 2050 October, 2050 100.00 100.55 100.71 100.00 100.83 99.20 100.00 99.75 98.40 100.00 99.95 101.82 November, 2050 100.00 98.54 98.83 December, 2050 100.00 97.52 98.68 100.00 97.43 percent. January, 2051 98.10 According to the Taylor rune, in January 2051 the central bank must have set the interest rate at Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct…arrow_forwarda) Which of the following would a classical macroeconomist disagree with? The interest rate is the price of time or productivity of capital Nominals effect nominals Recessions are caused by an over production of all economic goods Prices should be as flexible as possible Effective demand comes from prior supply b) Which of the following is true? The expected costs and returns for holding money are important for estimating the demand of real cash balances The difference between nominal GNP and real GNP is that nominal GNP has been adjusted by a price deflator to account for changes in the value of money (inflation) People in Group 1 receive the inflation tax on their cash-balances Interest is the price of money The real money supply is equal to the nominal money supply divided by the real money supplyarrow_forward
- A Keynesian economy is described by the following equations. Desired consumption equation: Cd = 300 + 0.4(Y – T) – 300r Desired investment equation: I d = 300 – 300r Government purchases G = 317 Taxes T = 305 Money demand equation L = 0.4Y – 600(r + πe ) The nominal money supply M = 4428 The expected rate of inflation, πe = 0.03 Full-employment values of output Y = 1305 2 (a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy in general equilibrium. (b) Now suppose government purchases increase to 347 with no change in taxes. What will be the real interest rate, the price level, output, consumption, and investment in the short run? What will be the real interest rate, the price level, output, consumption, and investment in the long run?arrow_forwardAn economy is described by the following equations: Desired consumption cd=130 +0.5(Y-T)-500r Id=100-500r Desired investment Government purchases G = 100 Taxes T = 100 Real money demand Money supply L = 0.5Y - 1000r M = 1320 Full-employment output Y = 500 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. Also assume the SRAS is horizontal at the current price level. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods' and asset mar- kets are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment.arrow_forwardA Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.arrow_forward
- In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?arrow_forwardConsider an economy that may be represented by the following short-run IS-LM model described by equations (1) through (6): (1) C 200+ 0.8(Y-T) (2) T = 800 (3) G = 500 (4) 1 700 - 25 r (5) Y=C+I+G (6) M/P = 0.6Y - 60r where the nominal money supply is M-600 and the price level is P = 1. Suppose that the government increases its expenditures by 100 units, but the Bank of Canada would like to maintain the interest rate constant. Then, (approximately) the money supply must decrease by 125.5 units and equilibrium output increases by 200 units. the money supply must decrease by 100 units and equilibrium output increases. by 250 units. the money supply must increase by 300 units and equilibrium output increases by 500 units the money supply must increase by 60 units and equilibrium output increases by 100 units.arrow_forwardConsider an AD-AS model with AD curve Y - Y* = −αy(n − ñ*) + € and AS curve π = π² + ¢ß(Y – Y*) + €s with parameter values a = 2, y = 1, p = 1 and ß = 2 and with inflation target * = : 0.01 and potential output normalised to Y* : = 1. e T Starting from a long-run equilibrium with ² = *, suppose there is a temporary supply shock €s = 0.05. Which of the following is FALSE? In the short run, inflation is 1% above target In the short run, output is 2% below potential In the short run, the real interest rate rises O In the short run, the real interest rate fallsarrow_forward
- Assuming that at equilibrium real money supply (M$/P) is equal to real money demand (Md /P), which is assumed to be a function of real income (Y), nominal interest rate (R), and technology (A) as follows: MS Y =A- R P (a) Specify the assumptions needed to uphold the prediction of quantity theory of money claiming that the ratio of money to GDP is constant in the long run.e (b) Assuming that the growth rate of Y is 4%, the growth rate of R is 0, and the growth rate of A is -1%, draw a diagram to indicate the relation between growth rate of MS (on the X-axis) and inflation rate (on the Y-axis).arrow_forwardIn the Keynesian model in the short run (IS-LM Framework), what is likely to happen to employment after each of the following shocks, based on the effective labor demand curve? How about an increase in the money supply?arrow_forwardConsider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. b. How does the misperception theory work? c. Which of the three markets discussed in class is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply.arrow_forward
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