Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 14, Problem 6RQ
To determine
To know: Definition of intermediate targets and it’s difference with
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The following set of equations describe an economy: C = 15,000+0.5(r-T)-50,000 rl^P = 10,000 - 25,000 г G = 8,000 NX = 2,600 T = 8,200 Y^* = 46,800 a. Find a numerical equation relating planned aggregate expenditure to output and to the real interest rate. PAE = b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint Set output Y equal to the value of potentia output given above in the equation you found in part a. Then solve for the real interest rate that also sets planned aggregate expenditure equal to potential output.) Instructions: Enter your response as a whole number. Real rate of interest:
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- According to the IS-LM model, a. what happens to the interest rate, income, and investment when government spending decreases? b. how the Fed should adjust the money supply to keep income at its initial level. What happens to the interest rate as a result? c. If the Fed's goal is instead to hold the interest rate constant, explain in words how the Fed should adjust the money supply when government spending decreases. What happens to income as a result? d. What is the Fed's dilemma?arrow_forwarda. Using the attached image as an example, graphically derive the LM curve, using instead a graph that relates money demand to income. Please put the stock of money on the vertical axis and income on the horizontal axis and set this diagram above the LM diagram. b. Please show how the IS curve and the LM curve can be shifted to get an increase in output without a change in interest rates. What kind of mixed monetary and fiscal policy is needed to do this? Will a reduction in interest rates, while holding output constant, do this?arrow_forwardGraphically show and link the long-run equilibrium in goods market and money market, using MD-MS diagram, Investment Expenditure diagram, AE-Y diagram, and AD-AS diagram. a. Clearly explain (using chain reactions) and show the short-run effect of an increase in money supply on the equilibrium of this economy. Make sure you clearly show the impact in all diagrams. b. In the same way, explain and show the long-run effect of the increase in money supply noting that your answer to this question picks up where you finished in part (a) and describes the adjustment process according to the output gap. c. Clearly describe based on your graphs, the long-term neutrality of money. d. Is the composition of Y* any different after the new long-run equilibrium establishes?arrow_forward
- “The steeper is the LM curve, the more effective is the monetary policy” Do you agree with the statement. Graphically explain.arrow_forwardThe following set of equations describe an economy: C = 16,000+ 0.5 (YT) - 50,000r IP = 7,000 - 24,000r G = 8,200 NX = 1,800 T = 8,500 48,620 Y* = a. Find a numerical equation relating planned aggregate expenditure to output and to the real interest rate. PAE= b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint. Set output Yequal to the value of potential output given above in the equation you found in part a. Then solve for the real interest rate that also sets planned aggregate expenditure equal to potential output.) Instructions: Enter your response as a whole number. Real rate of interest: %arrow_forwardExplain the relationship between the effectiveness of monetary policy and the interest elasticity of investment. Will the monetary policy be more or less effective the higher the interest elasticity of investment demand?arrow_forward
- If the FED decides to increase the quantity of money in the economy, the LM curve will shift right. True or Falsearrow_forwardExplain how the slope of LM curve affect the outcome of expansionary monetary policy (increase in money supply) with the diagram.arrow_forwardAccording to the IS–LM Closed economy model, if the government cuts taxes but the central bank (the Fed) wants to hold income constant, then the Fed must ______ the money supply. decrease first increase and then decrease increase keep unchangedarrow_forward
- Use the AD-AS model to illustrate what the impact of an expansionary monetary policyinstrument will be on the general price level and the level of realproduction and income in the economy.arrow_forwardWhat are the pros and cons of studying the IS-LM Model?Why is the IS curve called the goods market equilibrium schedule?Why is the LM curve called the money market equilibrium schedule?Explain how the equilibrium levels of income and the interest rate change if there is an increase in autonomous investment ( or government spending).Derive the AD curve from the IS-LM model.arrow_forwardIf the LRAS curve shifts, does the AS curve also have to shift? If the AS curve shifts, does the LRAS curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.) The Federal Reserve can use expansionary/contractionary policy to shift the AD curve. Use the AD–AS framework to show how monetary policy should be used to return output to potential GDP when: (i) the aggregate demand curve intersects the short-run aggregate supply curve to the left of potential GDP; and (ii) the aggregate demand curve intersects the short-run aggregate supply curve to the right of potential GDP. Given that the economy can correct itself and return to potential GDP, why would the Fed pursue contractionary monetary policy following a negative aggregate supply (inflation) shock? How could the Fed pursuing a contractionary monetary policy be preferable to the economy correcting itself? Is it possible that a contractionary monetary…arrow_forward
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