Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 26, Problem 2.1P
To determine
The changes in investment, consumption, and GDP (
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On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate in Europe by half a percentage point, to 2 percent. The bank’s president at the time, Willem Duisenberg, suggested that, in the future, the bank could reduce rates further. The rate cut was made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the economy? Be specific. What was the hoped-for result on C, I, and Y?
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Three countries are in a currency union. The countries are identical in that each has the same
equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each
country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for
the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an
increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter
8, Section 2.2 and may wish to review Chapter 8, Section 2.4.)
Table 1 Information about three countries
Country A
Country B
Country C
Equilibrium output
£50 billion
£50 billion
£50 billion
Equilibrium real
2%
2%
2%
interest rate
Inflation rate
2%
5%
9%
Select one:
O Country A
O Country B
O Country C
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Chapter 26 Solutions
Principles of Economics (12th Edition)
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- Which of the following is most likely to occur in an economy where the central bank significantly lowers interest rates? A) An increase in consumer savings B) A decrease in investment by businesses C) An increase in consumer and business borrowing D) A decrease in overall economic activityarrow_forwardThe following graph represents the money market in a hypothetical economy. This economy has a central bank, but unlike in Canada, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. PRICE LEVEL INTEREST RATE (Percent) 4.5 4.0 3.5 1.5 1.0 0.5 0 Money Demand 0.1 Money Supply 0,2 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.0 0.7 0.8 A New MS Curve OUTPUT + New Equilibrium Suppose the central bank announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the central bank will use open-market operations to ▼ the money by Y the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money-supply curve (MS) in the correct location. Place the black point (plus symbol) at the…arrow_forwardChanges in the money supply affect the interest rate through changes in the supply of loans, real GDP, the price level, and the expected inflation rate. True or False: The price-level effect describes the change in the interest rate due to a change in the expected inflation rate. False INTEREST RATE True The following graph shows the supply and demand curves in the market for loanable funds. Consider an increase in the expected inflation rate. Show the effect of this increase by dragging one or both curves on the graph. SLE QUANTITY OF LOANABLE FUNDS The income effect DLF The liquidity effect The expectations effect PLF SLF Which of the following refer to changes that affect the demand for loanable funds but not the supply? Check all that apply. The price-level effect (?arrow_forward
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