Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 9, Problem 3NP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
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Students have asked these similar questions
Suppose that an economy has a constant nominal money supply, a constant level of real output Y = 1500, and a constant real interest rate r = 0.05, and it’s expected rate of inflation is 2%, i.e, πe = .02. Suppose that the income elasticity of money demand is ηY = 0.5 and the interest elasticity of demand ηi = –0.2.
(a) Suppose that Y decreases to 1425, r remains constant at 0.05 and there is no change in the expected rate of inflation. What is the percentage change in the equilibrium price level?
(b) Suppose that r increases to 0.06 and Y remains at 1500. Assuming that expected inflation remains at πe = .02, what is the percentage change in the equilibrium price level?
(c) Suppose that r increases to 0.06. Assuming that πe = .02, what would real output have to be for the equilibrium price level to remain at its initial value?
If the money supply (M) is $300, the real GDP
(Q) is 200, the velocity of money (V) is 6, the
interest rates is 5% and the inflation rate is 3%,
then calculate nominal GDP.
Suppose the inflation rate is zero, the income
elasticity of money demand is 0.75, and the interest
elasticity of money demand is -0.25. Determine the
inflation rate that results from each of the following
events (starting back at zero for each one).
Enter all answers as integers with no decimal places.
If negative, be sure to include the minus sign before
the number (no spaces).
iii. The nominal interest rate rises from 5% to
6%.The
inflation rate is now
%?
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- Suppose that the real money demand function is L(Y,r+πe)=0.3Y÷ (r+πe) Where Y is real output, r is the real interest rate, and πe is the expected rate of inflation. Real output is constant over time at Y = 1500. The real interest rate is fixed in the goods market at r = 0.5 per year. Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist for ever. Currently, the nominal money supply is M = 400. What are the values of the real money supply and the current price level? (Hint: What is the value of the expected inflation rate that enters the money demand function?). Suppose that the nominal money supply is M = 400. The Bank of Namibia announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of real money supply and the current price level? Explain the effects on the…arrow_forwardSuppose the money demand function is Md/P = 1000+ 0.2Y - 1000 (r + π²). and Y = 2000, r = .06, π = .04, and Ms is 2600. Suppose the real interest rate rises to 0.11, and expected inflation rises to 0.09, but Y and Ms are unchanged. What would the inflation rate be? Select one: a. 4% b. 10% O c. 6% d. 8%arrow_forwardC = 100 + 0.5 - (Y –T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Ť= 100. The LM (money market equilibrium) curve is M Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is xª = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to “ = 0.05. 3. Continue to suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run but instead of output, the CB wants to bring the nominal interest rate i back to its long-run equilibrium level. Explain whether it should decrease or increase money supply M, and what happens to short-run output Y and the real interest rate r if this policy is followed. 4. Suppose the CB…arrow_forward
- C= 100 + 0.5 - (Y – Ť) I = 200 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 300, T= 200. The LM (money market equilibrium) curve is Y 10i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 2000 units of money, and expected inflation is a = 0.02. Assume that the long-run equilibrium level of output is Y = 1000. Short-run equilibrium output is initially at the same level (Y = 1000). Suddenly, news of a new world-beating super-vaccine raises the investment function to I = 250 – 1000 - r Question 4 The CB wants to use open market operations to reduce M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices? Question 5 After everyone is vaccinated, suppose that consumers suddenly withdraw all their checking deposits and start preferring cash…arrow_forwardMoney demand equation for a country is given by the equation (MP)d=e−λ(πe+r)+αY where πe is expected inflation, r is the real interest rate and Y is income. We assume that expected inflation equals actual inflation and also r and Y are considered as constant. Find the optimal level of inflation (π∗)which maximizes seigniorage revenue (S) ?arrow_forwardThe money supply of a country has been growing for many years causing expected inflation of 8% per year. The economy’s current GDP growth rate is 1%. The Central Bank’s full employment target GDP growth rate is 5%. The “real” interest rate, r, is 4%. Following a policy that targets only inflation, with speed of adjustments ay =0 and aπ = 0.5, where 6% is the new target inflation rate what should their target nominal interest rate be set at?arrow_forward
- C = 100 + 0.5 · (Y – T) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť= 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Suppose the government (not the CB) wants to stabilise the shock in the short-run. Explain whether it should inerease the government deficit (AĞ > AT) or reduce it (AĞ < AŤ), and how it works. 2. Now suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run. Explain whether it should decrease or increase money supply M if it wants to bring output Y back to its…arrow_forwardIf the demand for real money balances depends on the nominal interest rate, then higher inflation can increase the quantity of real money balances. be caused by an acceleration in the rate of real GDP growth. reduce the nominal interest rate. arise from the expectation of future money growth.arrow_forwardSuppose the inflation rate is zero, the income elasticity of money demand is 0.75, and the interest elasticity of money demand is -0.25. Determine the inflation rate that results from each of the following events (starting back at zero for each one). Enter all answers as integers with no decimal places. If negative, be sure to include the minus sign before the number (no spaces). i. The nominal money supply increases 10%. The inflation rate is now _% ii. Real income increases 8%. The inflation rate is now _%arrow_forward
- C = 100 + 0.5 - (Y –Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are G = 500, Î= 100. The LM (money market equilibrium) curve is Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Explain how the long-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix A best depicts the long-run change in the interest rate(s) due to the vaccine news shock? Explain. 3. Explain how the long-run values of (Y, P) are determined before the vaccine news shock. Appendix A Graphs for Q1.2 and Q2.3 Real Real Ierest Ireresa Rate Rate Ir) Tir)…arrow_forwardC = 100 + 0.5 - (Y – T') I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť = 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. Question 5 Suppose that consumers finally decide to get rid of cash altogether, and only use debit cards. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand?arrow_forward
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