ECONOMICS W/CONNECT+20 >C<
20th Edition
ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 36, Problem 8DQ
To determine
The causation of ECB adopting negative interest rate for stimulating the economy and its effect.
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Table shows the amount of savings and borrowing in a market, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? Now, imagine the supply curve shifts so that there will be $50 million less supplied at every interest rate. Calculate the current and the new equilibrium interest rate and quantity, and explain the situation: the reasons of decrease of supply and what new equilibrium mean.
Interest rate
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12. Use the classical model of a closed economy to predict how each of the following shocks
should affect a nation's real aggregate income (Y), national saving (S), investment (1I), and
interest rate (r). Be sure in each case to clearly state your predicted direction of change (up,
down, or no change) for all four variables and illustrate your predictions for S, I and r with a
supply/demand diagram for the loanable funds market.
a. The size of the labor force shrinks (L decreases)
b. Technological innovation increases total factor productivity (A increases)
c. The government cuts taxes (T decreases)
d. Autonomous investment (io) decreases.
4) a Suppose there is a decrease in consumer optimism about the future (often called a
decrease in consumer confidence). Specifically assume that consumer confidence (co) falls. What
will be the effect on consumption for any level of output and taxes? Show how the change in
consumption behavior will affect the IS-LM diagram. What is the effect on output and the
interest rate?
b Suppose the Federal Reserve wanted to eliminate the effects on output you described in
part (a). What could the Federal Reserve do to maintain constant output? In an IS-LM diagram,
show how this policy, when combined with the decrease in consumer confidence, maintains
constant output. How is investment ultimately affected by the combination of the decrease in
confidence and the Federal Reserve policy? How is consumption affected?
Chapter 36 Solutions
ECONOMICS W/CONNECT+20 >C<
Ch. 36.1 - Prob. 1QQCh. 36.1 - Prob. 2QQCh. 36.1 - Prob. 3QQCh. 36.1 - Prob. 4QQCh. 36.4 - Prob. 1QQCh. 36.4 - Prob. 2QQCh. 36.4 - Prob. 3QQCh. 36.4 - Prob. 4QQCh. 36.5 - Prob. 1QQCh. 36.5 - Prob. 2QQ
Ch. 36.5 - Prob. 3QQCh. 36.5 - Prob. 4QQCh. 36 - Prob. 1DQCh. 36 - Prob. 2DQCh. 36 - Prob. 3DQCh. 36 - Prob. 4DQCh. 36 - Prob. 5DQCh. 36 - Prob. 6DQCh. 36 - Prob. 7DQCh. 36 - Prob. 8DQCh. 36 - Prob. 1RQCh. 36 - Prob. 2RQCh. 36 - Prob. 3RQCh. 36 - Prob. 4RQCh. 36 - Prob. 5RQCh. 36 - Prob. 6RQCh. 36 - Prob. 7RQCh. 36 - Prob. 8RQCh. 36 - Prob. 9RQCh. 36 - Prob. 1PCh. 36 - Prob. 2PCh. 36 - Prob. 3PCh. 36 - Prob. 4PCh. 36 - Prob. 5PCh. 36 - Prob. 6PCh. 36 - Prob. 7P
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- Assume that the demand for real money balance (M/P) is M/P = 0.6Y-100i, where Y is national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?arrow_forwardREAL INTEREST RATE Suppose a hypothetical open economy uses the U.S. dollar as currency. The table below presents data describing the relationship between different real interest rates and this economy's levels of national saving, domestic investment, and net capital outflow. Assume that the economy is currently operating under a balanced government budget. Real Interest Rate (Percent) National Saving (Billions of dollars) Domestic Investment (Billions of dollars) 7 50 20 Net Capital Outflow (Billions of dollars) -10 6 45 30 -5 5 40 40 0 4 35 50 3 30 60 10 2 25 R 70 in 90 15 Given the information in the table above, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. 2 10 8 0 0 20 Market for Loanable Funds 40 60 80 100 QUANTITY OF LOANABLE FUNDS Demand ㅁ Supply +- Equilibriumarrow_forwardInterest Rate Qty. supplied Qty. demanded 5% 130 170 6% 135 150 7% 140 140 8% 145 135 9% 150 125 10% 155 110 The table above shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? Describe how you can tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate level. Calculate the new equilibrium interest rate and quantity and explain why the direction of the interest rate shift makes sense.arrow_forward
- "that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money" do you agree or disagree with this statement? provide two reasons why?arrow_forward1. [IS-LM Model - II] Let the IS equation be given as Y = then A 1-b where 1-b is the marginal propensity to save, g is the investment sensitivity to the interest rate i, and A is an aggregate of exogenous variables. Let the LM equation be Y 9 1-b T Mo 1 +-1, k where k and I are income and interest sensitivity of money demand, respectively and Mo is is the real money balances. If b = 0.7, g = 100, A = 252, k = 0.25,7 = 200, and Mo = 176, (a) Write the IS-LM system in matrix form. (b) Solve for Y and i by matrix inversion. Recall the formula for matrix inversion in the 2 x 2 case discussed in class. (c) Solve for Y and i by Cramer's rule.arrow_forwardConsider an economy with constant nominal money supply M=100, constant real output Y = 100, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also assume that expected inflation is zero and does not change (ne = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 90% О В. 50% О С. 3% O D. 0.9%arrow_forward
- Consider an economy with constant nominal money supply M=100, constant real output Y = 100, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also assume that expected inflation is zero and does not change (Te = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 50% O B. 3% O C. 0.9% O D. 90%arrow_forward2. Suppose a closed economy in the long run is characterized by the following equations: Y =C+I+G Y = Y = 5,000 C= 250+0.75 x (Y -T+Tr) I 1,000-50r G=1,000 T =1,300 Tr 300 Y is total output, Y is potential GDP (full employment output), C is consumption, / is investment, r is the real interest rate (as a whole number, so r 5 is a 5% real interest rate), G is government spending, T is taxes, and Tr is transfer payments. a. Look at the consumption function (the third equation). What is the marginal propensity to consume? What does it mean? What is autonomous consumption? What does it mean? b. Compute the level of consumption spending, private saving, public saving, and national saving. c. Find the equilibrium interest rate r and the associated level of investment spending. Note that the equilibrium interest rate you find will already be given in percentage terms. For example, if you find that r = 8, this mean that the interest rate is 8%. %3D d. Suppose that government spending increases…arrow_forwardConsider an economy with a constant nominal money supply, a constant level of real outout Y= 400, and a constant real interest rate r 10%. Suppose that the income elasticity of money demand is 1.20 and the interest elasticity of money demand is-0.10. a. By what percentage does the equilibrium price level differ from its initial value if output increases to Y 480.00 (and rremaine at 10%)? %AP= (enter your result as a percentage rounded to two decimal places). b. By what percentage does the equilibrium price level differ from its initial value if the real interest increases to r-12.50% (and Y remaina at 400)? %AP (enter your result as a percentage rounded to two decimal placea). c. Suppose that the real interest rate inoreases to re 12.50%. By what percentage would real output have to increase for the equilibrium price level to remain at its initial value? %AY- T(enter your reault an a percentage rounded to two decimal places)arrow_forward
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