Macroeconomics (7th Edition)
7th Edition
ISBN: 9780134738314
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Question
Chapter 17, Problem 17.3.6PA
To determine
The method of future inflation expectations of the households.
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In the model SIM of chapter 3 of the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., starting from a stationary state simulate the effect of an increase in government expenditure under four variations of the model:
a model with simple adaptive expectations Y De = Y D−1,
Discuss the trajectory of output from the original stationary state to the new one.
G_D is Government goods demand, and theta is Tax rate,
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Economics
If there is an inflationary gap, what should the Fed do? Explain, provide name, and show in i-M space.
Consider the following macroeconomy, with fixed prices (all amounts are in millions of $):
YFE = 7000
C = 40 + 0.9 YD
I = 500
G = 250
T = 40
a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any.
b. Prove that the appropriate relationship between I and various types of Savings holds at eqm.
c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why.
d. Go back to the original eqm in part a. Now…
In 2016, when the interest rate on 10-year German government bonds
became negative, an article in the Wall Street Journal noted that the interest rate
on 10-year bonds depended in part on investors' expectations of future short-term
interest rates. The article also noted that "investors don't seem to have changed their
perception of... [short-term] interest rates in the future." If the article is correct, can
the expectations theory explain why the interest rate on 10-year German government
bonds declined? Can the risk premium theory? Briefly explain.
Chapter 17 Solutions
Macroeconomics (7th Edition)
Ch. 17 - Prob. 17.1.2RQCh. 17 - Prob. 17.1.3RQCh. 17 - Prob. 17.1.4RQCh. 17 - Prob. 17.1.5PACh. 17 - Prob. 17.1.6PACh. 17 - Prob. 17.1.7PACh. 17 - Prob. 17.1.8PACh. 17 - Prob. 17.1.9PACh. 17 - Prob. 17.1.10PACh. 17 - Prob. 17.1.11PA
Ch. 17 - Prob. 17.1.12PACh. 17 - Prob. 17.1.13PACh. 17 - Prob. 17.2.1RQCh. 17 - Prob. 17.2.2RQCh. 17 - Prob. 17.2.3PACh. 17 - Prob. 17.2.4PACh. 17 - Prob. 17.2.5PACh. 17 - Prob. 17.2.6PACh. 17 - Prob. 17.2.7PACh. 17 - Prob. 17.2.8PACh. 17 - Prob. 17.2.10PACh. 17 - Prob. 17.2.12PACh. 17 - Prob. 17.3.1RQCh. 17 - Prob. 17.3.2RQCh. 17 - Prob. 17.3.4PACh. 17 - Prob. 17.3.5PACh. 17 - Prob. 17.3.6PACh. 17 - Prob. 17.3.7PACh. 17 - Prob. 17.3.8PACh. 17 - Prob. 17.4.1RQCh. 17 - Prob. 17.4.2RQCh. 17 - Prob. 17.4.3RQCh. 17 - Prob. 17.4.5PACh. 17 - Prob. 17.4.6PACh. 17 - Prob. 17.4.7PACh. 17 - Prob. 17.4.9PACh. 17 - Prob. 17.4.10PACh. 17 - Prob. 17.4.11PACh. 17 - Prob. 17.4.12PACh. 17 - Prob. 17.4.13PACh. 17 - Prob. 17.1RDECh. 17 - Prob. 17.2RDECh. 17 - Prob. 17.2CTE
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Similar questions
- Using the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., Simulate a scenario of the deterministic version of the model where the interest rate increases by one percentage point. What is the effect of the increase in the interest rate? Discuss using the below plots.arrow_forwardIn the Financial Times article “UK businesses expect prices to soar in the coming year” (3 March 2022) we can read: “British businesses expect inflation to rise at its fastest pace for five years, according to a Bank of England survey, […] the Bank of England has often quoted high business inflation expectations […] in recent months to support the need for further monetary policy tightening.” (a) Explain why the central bank considers business expectations when making decisions on monetary policy. (100 words) (b) In February 2022, inflation in the UK was expected to increase to close to 6% in February and March, before peaking at around 7 ¼% in April. Despite this, the Monetary Policy Committee in the Bank of England increase the policy rate to 0.25% to 0.5%, even if some members recommended an increase to 0.75%. Using the 3-equation model, depict the UK economy in February 2022, and provide some reasons why the Bank of England did not increase the interest rate to 0.75% (or higher).…arrow_forwardExplain the term “Rational Expectations” as Thaler used in the first chapter of Misbehaving.arrow_forward
- 1) https://www.econlowdown.org/resource-gallery/monetary_policy_tools 2) https://www.wsj.com/articles/zimbabwe-money-aa13a052?mod=hp_featst_pos5 3) https://news.sky.com/video/jamaican-bank-releases-reggae-song-on-inflation-12058864 please I need a short summary of these articles.arrow_forwardOn March 20, 2024, the statement that best describes the Federal Reserve's stance on inflation and interest rates for 2024 is: Inflation is on a road to %. Choose the words that best fill in the blanks. Multiple Choice moving down slowly, sometimes bumpy, 2% moving down slowly, sometimes bumpy, 3% moving down slowly, smooth, 3% moving down quickly, sometimes bumpy, 2% moving down quickly, sometimes bumpy, 3% Prev 15 of 18 Next>arrow_forwardUse the following diagram to answer the next question. Price Levell LRAS Y* AD1 AD2 Multiple Choice AD3 A51 Real GDP browser=0&launchUrl=https%253A 252F%252Fnewconnect.mheducation.com Assume the economy is initially at the full employment level of real GDP. If there is a decrease in imports, the Fed should increase money demand. decrease money demand Savedarrow_forward
- According to rational expectations economists, as a result of an increase in aggregate demand due to an expansionary monetary policy, real output and employment would not increase because said policy would be offset by higher prices and Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardSuppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forward
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