Homework Answers
14. Central bank underestimates effect of interest rate on expenditure.
Supply shock implies fall in supply. To recover from this, CB adopts monetary expansion to reduce interest rates and to induce investment expenditure. But due to underestimation of responsiveness of expenditure to interest rate, it will end up doing over expansion of money supply.
Actual effect of over-expansion: Expansion of output and more inflation.
Ans (c) Expansion; inflation above target.
15. According to CB, natural rate = actual rate = 6%. No action taken.
Actual effect: Via phillips curve, higher current unemployment (6%) than natural (5%) means fall in inflation.
Ans (c) A decrease in inflation followed by an increase in the real interest rate.
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14) Suppose the AE curve is mis-measured such that the Central Bank under- estimates the effects...
15) Suppose the Central Bank believes the natural unemployment rate to be 6% when actually it...
15) Suppose the Central Bank believes the natural unemployment rate to be 6% when actually it is 5%. It measures the output gap using Okun’s Law. The unemployment statistics are released suggesting the current unemployment rate is 6%. The Central Bank follows the Taylor Rule. Which of the following do we expect to occur? (For simplicity you can assume there are no lags) a) An increase in inflation followed by an increase in the real interest rate b) An increase...
Please complete the statements. An ideal economic situation for a central bank would be one of...
Please complete the statements. An ideal economic situation for a central bank would be one of rates of unemployment, suggesting that output is high, coupled with rates of inflation, giving central banks more leeway to help mitigate recessions. However, due to real shocks which increase input prices, central banks must sometimes choose between low rates of growth, resulting in rates of unemployment, or equally unwanted rates of inflation. If the Federal Reserve increases the money supply too much, might become...
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...
1) of the Central Bank of Kuwait puts in place an expansionary monetary policy, its decision...
1) of the Central Bank of Kuwait puts in place an expansionary monetary policy, its decision is based on A) the fact that the economy is at ful employment B) Expectation of excessive inflation in the future C) the fact that the economy is in an expansion D) Unemployment level is high 2) When the interest rate is set at a very low rate A) the opportunity cost of holding money is very low B) the money demand will shift...
Macroeconomic Multiple Choice Questions Answer All 10 Questions* 1) If the Central Bank of Kuwait puts...
Macroeconomic Multiple Choice Questions
Answer All 10 Questions*
1) If the Central Bank of Kuwait puts in place an expansionary monetary policy, its decision is based on A) the fact that the economy is at full employment B) Expectation of excessive inflation in the future C) the fact that the economy is in an expansion D) Unemployment level is high 2) When the interest rate is set at a very low rate A) the opportunity cost of holding money is...
RBA is the central bank QUESTION 12 If inflation is too high, the RBA will the...
RBA is the central bank
QUESTION 12 If inflation is too high, the RBA will the RBA can intervene via open market (increase / decrease) its cash rate target. If the actual cash rate remains below the target, (purchases / sales] of bonds. The yield curve is likely to shift (up / down), especially at its (short/ long) end. The impact on the long end of the yield curve can be strengthened by convincing market participants that the new cash...
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,...
Which of the following statements would be true if the short-run Phillips curve relationship held in...
Which of the following statements would be true if the short-run Phillips curve relationship held in the long run? a. Only monetary policy, not fiscal policy, has any real effects on the economy. b. A central bank can always steer an economy out of recession, simply through creating inflation. c. Expansionary monetary policy can decrease inflation at the expense of unemployment. d. A central bank has no control over unemployment. e. Prices fully adjust in the long run.
Please complete the statements. An ideal economic situation for a central bank would be one of rates of unemployment, suggesting that output is high, coupled with rates of inflation, giving central banks more leeway to help mitigate recessions. However, due to real shocks which increase input prices, central banks must sometimes choose between low rates of growth, resulting in rates of unemployment, or equally unwanted rates of inflation. If the Federal Reserve increases the money supply too much, might become...
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...
1) of the Central Bank of Kuwait puts in place an expansionary monetary policy, its decision is based on A) the fact that the economy is at ful employment B) Expectation of excessive inflation in the future C) the fact that the economy is in an expansion D) Unemployment level is high 2) When the interest rate is set at a very low rate A) the opportunity cost of holding money is very low B) the money demand will shift...
Macroeconomic Multiple Choice Questions
Answer All 10 Questions*
1) If the Central Bank of Kuwait puts in place an expansionary monetary policy, its decision is based on A) the fact that the economy is at full employment B) Expectation of excessive inflation in the future C) the fact that the economy is in an expansion D) Unemployment level is high 2) When the interest rate is set at a very low rate A) the opportunity cost of holding money is...
RBA is the central bank
QUESTION 12 If inflation is too high, the RBA will the RBA can intervene via open market (increase / decrease) its cash rate target. If the actual cash rate remains below the target, (purchases / sales] of bonds. The yield curve is likely to shift (up / down), especially at its (short/ long) end. The impact on the long end of the yield curve can be strengthened by convincing market participants that the new cash...
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,...
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