Describe how, if at all, each of the following developments affects the IS and/or MP curves:...
Describe how, if at all, each of the following developments affects the IS and/or MP curves:
The central bank changes its policy rule to be more aggressive in responding to changes in output. Specifically, it decides that it will increase the real interest rate by more than before if output rises, and cut it by more than before if output falls.
Homework Answers
In the graph, IS0 and LM0 are initial IS and LM (MP) curves, intersecting at point A with initial interest rate r0 and output Y0.
Higher interest rate sensitivity will make the LM (MP) curve steeper than before, so at every output level, the interest rate will be higher than before.
In the following graph, LM (MP) curve changes its shape from LM0 to LM1, intersecting IS0 at the same output level Y0 for a higher interest rate r1.
Add Answer to:
Describe how, if at all, each of the following developments
affects the IS and/or MP curves:...
Suppose the central bank, instead of following the rule r = r(Y,π), has a target level...
Suppose the central bank, instead of following the rule r =
r(Y,π), has a target level of inflation. Specifically, it sets r
according to r = rLR + b[π − π*]. Here rLR is the real interest
rate when the economy is in long-run equilibrium; that is, it is
the real interest rate that causes the loan market to be in
equilibrium when Y = �Y. In addition, π* is the central bank’s
target level of inflation, and b is...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
please answer Question 7: Inflation targeting and the Taylor rule in the IS-LM model Consider a...
please answer Question 7:
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation,...
1. For each of the following situations, describe how (if at all) the IS, MP, and...
1. For each of the following situations, describe how (if at all) the IS, MP, and AD curves are affected. a. A decrease in financial frictions. b. An increase in taxes and an autonomous easing of monetary policy. c. An increase in the current inflation rate. d. A decrease in autonomous consumption. e. Firms become more optimistic about the future of the economy. 2. What evidence is used to assess the stability of the money demand function? What does the...
5. Suppose that instead of following the interest rate rule r=r(Y), the central bank keeps the...
5. Suppose that instead of following the interest rate rule r=r(Y), the central bank keeps the money supply constant. That is, suppose M = M. In addition, suppose that prices are completely rigid, so that the nominal and the real interest rate are necessarily equal; money-market equilibrium is therefore given by M/= = L(r,Y). a. Suppose that the money market is in equilibrium when r = ro and Yo. Now suppose Y rises to Y). For the money market to...
What happens to the real exchange rate and net exports in each of the following cases?...
What happens to the real exchange rate and net exports in each of the following cases? a. The world interest rate rises (r*) b. expansionary fiscal policy at home i.e. domestic output rises c. Foreign demand for domestic goods falls as result of contraction fiscal policy at abroad d. Import restrictions i.e. quota or tariffs on foreign goods e. The domestic prices rise more than foreign prices f. nominal exchange rate e falls
IS-LM-FX Model with Floating Exchange Rate [20 points 3 For each of the following situations use...
IS-LM-FX Model with Floating Exchange Rate [20 points 3 For each of the following situations use the IS-LM-FX model to illustrate, first, the effects of the temporary shock and then the policy response. (Note: Assume the central bank responds by using monetary policy to stabilize output (ie. to keep it at the initial equilibrium)) Label A the initial equilibrium, B the short-run equilibrium without policy response, and C the equilibrium after the response of the central bank. For each case,...
For all the questions below select the appropriate answer: MP IMP Interest rate i INTY) Real...
For all the questions below select the appropriate answer: MP IMP Interest rate i INTY) Real money balances The money market in the diagram presented shows that with unchanged demand for money the market adjustment to an increase in real money supply: changes the price level to hold the real money supply constant has no effect on interest rates or bond prices. raises the equilibrium interest rate from it to lo as portfolio managers bid bond prices down. lowers the...
1. What is the short-run effect on the exchange rate of an increase in domestic real...
1. What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates? A.Money demand increases, the domestic interest rate increases, and the domestic currency depreciates. B.Money demand increases, the domestic interest rate increases, and the domestic currency appreciates. C.Money demand decreases, the domestic interest rate decreases, and the domestic currency appreciates. D.Money demand decreases, the domestic interest rate decreases, and the domestic currency depreciates. 2. In our discussion of...
Suppose the central bank, instead of following the rule r =
r(Y,π), has a target level of inflation. Specifically, it sets r
according to r = rLR + b[π − π*]. Here rLR is the real interest
rate when the economy is in long-run equilibrium; that is, it is
the real interest rate that causes the loan market to be in
equilibrium when Y = �Y. In addition, π* is the central bank’s
target level of inflation, and b is...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
6.
7.
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
please answer Question 7:
Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation,...
5. Suppose that instead of following the interest rate rule r=r(Y), the central bank keeps the money supply constant. That is, suppose M = M. In addition, suppose that prices are completely rigid, so that the nominal and the real interest rate are necessarily equal; money-market equilibrium is therefore given by M/= = L(r,Y). a. Suppose that the money market is in equilibrium when r = ro and Yo. Now suppose Y rises to Y). For the money market to...
IS-LM-FX Model with Floating Exchange Rate [20 points 3 For each of the following situations use the IS-LM-FX model to illustrate, first, the effects of the temporary shock and then the policy response. (Note: Assume the central bank responds by using monetary policy to stabilize output (ie. to keep it at the initial equilibrium)) Label A the initial equilibrium, B the short-run equilibrium without policy response, and C the equilibrium after the response of the central bank. For each case,...
For all the questions below select the appropriate answer: MP IMP Interest rate i INTY) Real money balances The money market in the diagram presented shows that with unchanged demand for money the market adjustment to an increase in real money supply: changes the price level to hold the real money supply constant has no effect on interest rates or bond prices. raises the equilibrium interest rate from it to lo as portfolio managers bid bond prices down. lowers the...
Most questions answered within 3 hours.
-
Starch polymers are broken down by enzymes into monomers
called:
a.)maltose
b.) dextrins
c.) glucose
d.)...
asked 4 minutes ago -
How does HA (High Availability) work and name two ways it can
help an organization?
asked 6 minutes ago -
Saginaw Company is a garden products wholesale firm. In
December, Saginaw Company expects to sell 26,000...
asked 6 minutes ago -
Write a program for the management of a bookstore in java,
WITHOUT THE USE OF BOOK...
asked 7 minutes ago -
. Consider the Malthusian model and assume Y = zF (L; N) = zLN 1
,...
asked 20 minutes ago -
Reasons that BMW located their manufacturing plant in
Spartanburg South Carolina include ___________
a favorable tax...
asked 21 minutes ago -
17) Complete the following by balancing the chemical
reactions:
(a) H2(g) + N2(g) → NH3(g)
(b)...
asked 22 minutes ago -
When performing a hypothesis test for the ratio of two
population variances, the upper critical F...
asked 27 minutes ago -
You are considering buying a call option for Bernie Bros, a
company that is building a...
asked 27 minutes ago -
How are the concepts of microevolution and macroevolution
linked?
asked 38 minutes ago -
Two vectors, given in unit vector notation, are A = 5i + 4j + 3k
and...
asked 40 minutes ago -
Let C = (2.25 m, 15 ∘ above the negative x-axis) and D = (30.6
m,...
asked 53 minutes ago