Homework Answers
Answer
Option 2
Increase the money supply
The target means a fix interest rate. An increase in income increases interest rate so to control it central bank increases money supply which eliminates the effect of an increase in income and stabilizes the interest rate.
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Question 80 If the central bank directly targets the interest rate in response to an increase in income, the centra...
Consider the following IS-LM model, in which the central bank targets an interest rate of i...
Consider the following IS-LM model, in which the central bank targets an interest rate of i C 11500.3YD 1 = 2000 + 0.3Y-8000i G 2000 T 1500 = 4Y-16,000i -= 0.02 c) Solve for value of the real money supply that the central bank must set to achieve its interest rate target, and the equilibrium level of output, by combining the IS and LM relations. Compute the values of equilibrium consumption, investment, and money demand. If the GDP deflator is...
4. Suppose the central bank wants to keep the real interest rate constant at some level,...
4. Suppose the central bank wants to keep the real interest rate constant at some level, ř. Describe whether it needs to increase, decrease, or not change the money supply to do this in response to each of the following developments. Except in part (d), assume that P is permanently fixed at some exogenous level, P. a. The demand for money at a given P, i, and Y increases. b. There is an upward shift of the consumption function. c....
If the Fed holds the interest rate constant in response to an increase in government purchases,...
If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will , and the impact on income will be than if the money supply were held constant. a. increase, larger b. increase, smaller c. decrease, larger d. decrease, smaller
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. a. Using Classical Theories, suggest an appropriate long-term monetary policy. State the essential assumptions. (4 marks) b. Suppose a new Chairman of the central bank will assume his duty next year. He is widely expected to be a “monetary hawk” – he favors a “tighter” growth in the money supply. Other things being constant, how would this affect the expected inflation...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. a. Using the Classical Theories, suggest an appropriate long-term monetary policy. State the essential assumptions. (4 marks) b. Suppose a new Chairman of the central bank will assume his duty next year. He is widely expected to be a "monetary hawk”-he favors a "tighter" growth in money supply. Other things being constant, how would this affect the expected inflation rate, nominal...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. a. Using the Classical Theories, suggest an appropriate long-term monetary policy. State the essential assumptions. (4 marks) Suppose a new Chairman of the central bank will assume his duty next year. He is widely expected to be a “monetary hawk” – he favors a “tighter” growth in money supply. Other things being constant, how would this affect the expected inflation rate,...
A central bank has a new head, who decides to increase the response of interest rates...
A central bank has a new head, who decides to increase the response of interest rates to inflation. How does this change in policy affect the response of the economy to a supply shock? Give graphical answer and a more intuitive economic explanation.
Explain how a central bank action on an increase in the interest cash rate ripple through...
Explain how a central bank action on an increase in the interest cash rate ripple through the economy and lead to the target policy goal.
3. Suppose that prices are completely rigid, so that the nominal and the real interest rate...
3. Suppose that prices are completely rigid, so that the nominal and the real interest rate are necessarily equal. Money-market equilibrium is therefore given b L(r,Y). a. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep the interest rate unchanged. i. Does the money supply rise or fall? ii. What happens to consumption and investment? b. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep output...
ISuppose that in a country the real demand for liquidity is L(R,Y)-2Y/100R.Assume that the interest rate...
ISuppose that in a country the real demand for liquidity is L(R,Y)-2Y/100R.Assume that the interest rate in the foreign country is 24%(R" 0.24),the domestic income is $1000 billion and the domestic price level is P-1.2.As a central banker,you want to keep the nominal exchange rate fixed at E= 1.5. (1): What should be the domestic interest rate?(Answer with a number instead of a percentage) (2):What should the nominal money supply be(in billions)? (3):If the money supply in the foreign country...
Consider the following IS-LM model, in which the central bank targets an interest rate of i C 11500.3YD 1 = 2000 + 0.3Y-8000i G 2000 T 1500 = 4Y-16,000i -= 0.02 c) Solve for value of the real money supply that the central bank must set to achieve its interest rate target, and the equilibrium level of output, by combining the IS and LM relations. Compute the values of equilibrium consumption, investment, and money demand. If the GDP deflator is...
4. Suppose the central bank wants to keep the real interest rate constant at some level, ř. Describe whether it needs to increase, decrease, or not change the money supply to do this in response to each of the following developments. Except in part (d), assume that P is permanently fixed at some exogenous level, P. a. The demand for money at a given P, i, and Y increases. b. There is an upward shift of the consumption function. c....
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. a. Using the Classical Theories, suggest an appropriate long-term monetary policy. State the essential assumptions. (4 marks) b. Suppose a new Chairman of the central bank will assume his duty next year. He is widely expected to be a "monetary hawk”-he favors a "tighter" growth in money supply. Other things being constant, how would this affect the expected inflation rate, nominal...
Suppose a central bank targets an inflation rate of 3%. She projects a long-term economic growth rate of 4%. a. Using the Classical Theories, suggest an appropriate long-term monetary policy. State the essential assumptions. (4 marks) Suppose a new Chairman of the central bank will assume his duty next year. He is widely expected to be a “monetary hawk” – he favors a “tighter” growth in money supply. Other things being constant, how would this affect the expected inflation rate,...
3. Suppose that prices are completely rigid, so that the nominal and the real interest rate are necessarily equal. Money-market equilibrium is therefore given b L(r,Y). a. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep the interest rate unchanged. i. Does the money supply rise or fall? ii. What happens to consumption and investment? b. Suppose that government purchases increase, and that the central bank adjusts the money supply to keep output...
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