Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 7, Problem 5NP
a)
To determine
Percentage of difference between
b)
To determine
Percentage of difference between equilibrium price level and initial value if real interest rate increases to 0.11
c)
To determine
Real output level
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Similar to how the quantity demanded for a good depends on its price, the quantity of money demanded depends on the cost of holding money, or the nominal interest rate (i). In addition to this, the demand for real money balances is also a function of income (Y). Using all of this information, suppose the demand for real money balances takes on the following functional form:
(M/P)dd=500 + 2Y – 9i
The Fisher equation relates the nominal interest rate to the real interest rate (r) and the expected rate of inflation (Eπ) when examining ex-ante (based on forecasts or 'before the event') effects. The equation ( (M/P)dd = 500 + 2Y – 9(Eπ – r)/(M/P)dd = 500 + 2Y – 9(r – Eπ) / (M/P)dd = 500 + 2Y + 9(r + Eπ) / (M/P)dd = 500 + 2Y – 9(r + Eπ) ) is equivalent to the function given for the demand for real money balances.
Suppose the central bank announces that it will increase the money supply in the future, but it does not change the money supply today. Complete the following…
When consumers and businesses have greater confidence that they will be able to repay loans in
the future:
The quantity supplied of financial capital at any given interest rate will shift to the right
The quantity demanded of financial capital at any given interest rate will shift to the right
The quantity demanded of financial capital at any given interest rate will shift to the left
The quantity supplied of financial capital at any given interest rate will shift to the left
3-) Consider an economy with the following economic functions;
cd=1000+ 0.45Y - 45000r - 0.5G
Id = 500 22500r
Md
-0.5Y - 3000
P
And other variables are ² = 0.04, G=250, Y = 500, and M = 4200.
a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
b) Suppose the money supply increases to 8400. Find the equilibrium values of the real interest rate,
consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged)
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