Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 4AP
a)
To determine
Effect on output, real interest rate and current price elevl due to temporary increase in government purchases
b)
To determine
Effect on output, real interest rate and current price level due to reduction in expected inflation
c)
To determine
Effect on output, real interest rate and current price level due to temporary increase in labor supply.
d)
To determine
Effect on output, real interest rate and current price level due to an increase in the interest rate paid on money.
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Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
A decrease in the price level leads to greater real wealth and more savings, which reduces the interest rate and increases investment.
Suppose that the money demand function is (M/ P)^d = 1000-100r where r is the interest rate in percent. The money supply M is 1000 and the price level P is 2.
(a) What is the equilibrium interest rate?(b) Assume the price level is xed. What happens to the equilibrium interest rate if the supply of money is raised from 1000 to 1200?
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