Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 2AP
a)
To determine
To find: The impact on output and interest rate due to increase in money
b)
To determine
To know: The impact on output and interest rate due to temporary increase in government purchases.
c)
To determine
To find: The impact on output and interest rate due to an adverse supply shock.
d)
To determine
To find: The impact on output and interest rate due to decline in consumer confidence.
e)
To determine
To find: The impact on output and interest rate due to increase in export demand.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Planned aggregate expenditure in the fictitious country "Alpha" depends on real GDP and the real interest rate according to the
following equation:
PAE= 2,000 + 0.75 Y – 1,000r.
The Alpha Bank, the country's central bank, has announced that it will set the real interest rate according to the policy reaction
function found the the first two columns of the table below.
For the rates of inflation given, find autonomous expenditure and short-run equilibrium output in Alpha.
Autonomous
Inflation rate, n
Real interest rate, r
expenditure
Equilibrium output
e.00
0.01
0.01
0.02
0.02
0.03
0.03
0.04
0.04
0.05
Using the data above, graph the AD curve.
Central 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].
Continuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of
1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the
market interest rate is usually above the central bank policy rate. In the following questions, assume the normal
(natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is
300bp, the economy's natural real market interest rate is 2% and that both actual and expected inflation is 1%.
a) what nominal policy rate would you recommend?
b) what is the natural nominal policy interest rate?
c) how does the new market real interest rate compare with its initial level?
t) what nominal policy rate would the Taylor Rule recommend if the negative output gap then widened to minus 2%
and both current and expected inflation fell to zero? (other factors, including the risk premium remaining unchanged)
Knowledge Booster
Similar questions
- Suppose the real money demand function is given by () = 0.5Y - 50i, where i is the nominal interest rate in percent. The real interest rate r is fixed at 2%, the quantity of money M is 200, and output Y is 800. Assume that output and velocity are constant. If expected inflation is 1.5%, what are i and P?arrow_forwardConsider the following: C = 400 + 0.5·(Y – T) I = 80 + 0.1·Y – 1000·(i – πe + x)NX = 0.01·Y*– 0.1·Y – 4·(E – 100) G = 600 T = 480 Y* = 20,000 The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100. Then assume the governent cuts tax level from T=480 to T′ = 400: a) Find the short run equilibrium level of output and trade balance? a) If the economy was at potential before, what effects will the tax cut form 480 to 400 have on investments and on trade balance in the medium run?arrow_forwardContinuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy’s natural real market interest rate is 2% and that both actual and expected inflation is 1%. 5a) what nominal policy rate would you recommend? 5b) what is the natural nominal policy interest rate? 5c) how does the new market real interest rate compare with its initial level? 5d) what nominal policy rate would the Taylor Rule recommend if the negative output gap then widened to minus 2% and both current and expected inflation fell to zero? (other factors, including the risk premium remaining unchanged)arrow_forward
- Consider the following Taylor rule i=0.02+0.75y+0.25(pi-2%) Notice that the central bank puts a higher policy weight on output than inflation. Imagine that inflation is 2%. How large should be the decline in output relative to the full-employment level for the central bank to hit the zero lower bound? A. 0.00% B. 1.27% C. 2.67% D. 4.00%arrow_forwardConsider the following: C = 400 + 0.5·(Y – T) I = 80 + 0.1·Y – 1000·(i – πe + x)NX = 0.01·Y*– 0.1·Y – 4·(E – 100) G = 600 T = 480 Y* = 20,000 The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100. a) Find short-run equilibrium level of output (Y) and trade balance (NX). Is there a trade deficit or surplus? b) Assume the governent cuts tax level to ?′ = 400. What is the new short run equilibrium level of output (?′) and trade balance (NX'). Is this economy suffering from twin deficits (trade and budget). What policy change could help?c) what is the value of the fiscal multiplier fromt he tax cut? if it were a closed economy would it be greater or smaller? d) What effects will the tax cuts have on investments and on the…arrow_forwardAn economy has the following money demand function. 0.5 Y where the nominal interest rate is in percentage points. Nominal interest rate is 9 percent. (M/P) d = Suppose the announcement of a new head of the central bank, with a reputation of begin hard on inflation, decreases expected inflation rate by 8 percentage points. What is the new velocity of money? QUESTION 14 If, in the aftermath of the announcement, both the economy's output and the current money supply are unchanged, what happens to the price level? O 1.67 2.67 3.67 O 4.67arrow_forward
- Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal. In this situation, the Taylor rule implies thatarrow_forwardA) Consider the Taylor rule: rt = (s1)[rt−1] + (s2)[rn + ayY˜+ aπ(πt πT )]. Assume target inflation at 2% and natural rate of interest at 1.8%. (a) If output gap increase by 1.5% and actual inflation to 4%, how much will be the interest rate increase from 2% if the central bank gives twice more weight to output gap as compared to inflation targeting weight of 0.5? Assume s1 = s2 = 0. [Write the Taylor rule first and then compute] b) Which component of this Taylor rule captures smoothness of interest rate changes? and How?arrow_forwardSuppose an economy for which the Dynamic Aggregate Supply in period t is given by the equation: + 12 (Y₁₂ - Y). π₁ = πⓇ where is the inflation target set by the monetary authority and Y the potential or long-run equilibrium of output. Which of the panels below contains the correct graphical representation of this DAS? (go to full screen to see all the panels at once) A Tit 1 TT + # Ý DAS-1 B TL πt 1 Y DAS-1 Y₁arrow_forward
- In the monetary intertemporal model, assume that money supply is always fixed. Suppose that there is an increase in real wage. How does this change affect interest rates (both real and nominal), price level, employment, total factor productivity and equilibrium output? Carefully explain your answers. b) Suppose that, in a liquidity trap, bank reserves are less liquid than government debt. If the Central Bank conducts an open market purchase of government debt, what is the effect on price level? Use an appropriate set of diagram to explain your answer.arrow_forwardWith a policy of nominal GDP targeting, if the Fed expected 6% growth in real GDP and wanted an inflation rate of 2%, it would set a target for nominal GDP growth of 8% per year. True Falsearrow_forwardSuppose the economy is initially at full employment. Suppose further that in period 1 households experience an increase in their subjective discount factor from β to β′ > β. This type of shock is known as a natural rate shock. Characterize graphically the effect in period 1 on consumption of non-tradables, unemployment, the relative price of non-tradables, and the real wage measured in units of tradable goods under two alternative monetary policy regimes: A. A fixed exchange rate regime. B. A floating exchange rate regime in which the central bank pursues full employment and price stability.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education