Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 1E
(a)
To determine
Determine the level of nominal interest rate.
(b)
To determine
Determine the nominal interest rate if
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Students have asked these similar questions
Suppose the Central Bank sets 1 year real interest rates by following this Taylor rule:
rt = r +0.5(π⁹² − л*)
and where r = 4% and л* = 3%
-
where is the expected inflation rate
Nominal interest rates are equal to the real interest rate plus the expected inflation rate
it = rt + πe
(a) Suppose in period 1 inflation is expected to be 1%.
Calculate the 1 year nominal and real interest rates in period t.
(b) Calculate the 1 year nominal and real interest rates when inflation
is expected to be 5% for the period t+1.
(c)
(d)
(e)
Calculate the 1 year nominal and real interest rates when inflation
is expected to be 5% for the period t+2.
Calculate the nominal 2 year rate and 3 year rates at time t, for the yield curve.
What will the yield curve look like and why?
b.
Suppose a country has a money demand function (M/P)d= kỲ, where k is a constant parameter. The
money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is
the average inflation rate?
Which of the following will result in an increased inflation rate?
Select One:
a) Low interest rates, low government spending
b) High interest rate, low taxes
c) Low interest rate, high taxes
d) High interest rate, high government spending
e) Low interest rates, low taxes
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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- Research suggests that macroeconomic factors can explain the dynamics of interest rates in the economy. Suppose we are interested in understanding whether inflation plays a role in explaining interest rates. Fitting a line between the current nominal interest rate i and current inflation we obtain: i = 0.041 -0.147 What is the expected level of interest rates when inflation is at the level of 4%?arrow_forwardSuppose that the level of unemployment in the economy is determined by the follow equation: U = 7.55 1.88*(i - ie) Where U is the unemployment rate, i is the actual inflation rate, and it is the expected inflation rate. All variables are entered in percentage form (e.g. if inflation is 30.57%, you plug in 30.57 for i, not 0.3057). Last year, the inflation rate was 7.87%, and people have adaptive expectations. What does the inflation rate need to be this year in order for the unemployment rate to be 2.81%? Note: Everything is already in percentage form. You do not need to multiply or divide by 100 at any point. Enter in your answer as it is calculated in the equation. Round your final answer to two decimal places.arrow_forwardQ1: e) What are the various effects of inflation?f) State and explain the monetary measures to control inflation.arrow_forward
- The Taylor Rule is given by rt = it +Pt+ 0.5(it - i*t) + 0.5(u*t-ut) The Federal Reserve is targeting 2% inflation and the natural rate of unemployment is believed to be 4.7%. Economic data suggests that the inflation rate is currently 4.7% while the unemployment rate is 9.8%. The real rate of interest is believed to be 2.5%. According to the Taylor Rule, what target should the Federal Reserve set for the Federal Funds Rate? Put your final answer in percentage form (e.g. 30.57 not 0.3057), but be careful about this. If you just use the numbers as is, you don't need to adjust anything. Round your final answer to two decimal places. Both positive and negative answers are possible.arrow_forwardCentral bank has the following loss function:L=−(yt −ye)+β(πt −πT )2 (13.1) Consult Chapter 13 to answer the following questions: (a) What can we interpret about the central bank’s preferences from this loss function (Equation 13.1)? (b) Briefly explain how this loss function compares to the standard loss function and a loss function with yT > ye. (c) Find the inflation bias for a central bank with this loss function (Equation 13.1). [Hint: see Section 4.6 in Chapter 4].arrow_forwardb. Suppose that the parameters of the monetary policy rule are r=2%, m=1/2, and the inflation target is 2%. Compute the level of the (ex-post) nominal interest rate when the inflation rate takes the following values: 1%, 0%, and -1%.arrow_forward
- Distinguish between the general inflation rate and the average inflation rate for specific goods?arrow_forwardIn 1979, when the fed was deciding how aggressively to fight inflation, the typical estimate of the sacrifice ratio was A) 5 B) 1 C) 10 D) 7arrow_forwardThere are two countries in the world, A and B. Suppose the central bank in country A has an annual inflation target pai = 0.02 while the central bank in country B has anannual inflation target pai = 0.03. In the long run, we would expect the nominalexchange rate of country A to appreciate against country B at a rate of about 1% per year.True or False? Explain.arrow_forward
- Consider the following expressions: π = πe + ε(un − u) (1) L(u,π) = a(u − un) + π2 (2)1) Assign a label to expression (1) and (2) and interpret them in detail.2) Utilizing expression (1) and (2) find the optimal level of inflation under discretionary monetary policy outlook. Also interpret the derived value.arrow_forwardConsider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?arrow_forwardUse the graph(s) created in the previous question to contrast the effects and consequences of inflation and deflation in the short and long term. (the question before was: Using the data in the table, integrate the expected relationship of the behavior of inflation with the phases of the economic cycle. You must use the different levels of inflation rate with economic growth and construct graphs to present your analysis arguments.)arrow_forward
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