Consider an economy with constant nominal money supply M=100, constant real output Y = 100, and constant real interest rate r = 0.1. Suppose that the income elasticity of money demand is 0.5 and the interest rate elasticity of money demand is -0.1. Also assume that expected inflation is zero and does not change (ne = 0). This implies that the nominal interest rate is equal to the real interest rate. By what percentage does the equilibrium price level differ from its initial value if output increases to Y = 120, money supply doubles but r remains at 0.1? O A. 90% O B. 50% O C. 3% O D. 0.9%
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- An economy is described by the following equations: Desired consumption cd=130 +0.5(Y-T)-500r Id=100-500r Desired investment Government purchases G = 100 Taxes T = 100 Real money demand Money supply L = 0.5Y - 1000r M = 1320 Full-employment output Y = 500 Assume that expected inflation is zero so that money demand depends directly on the real interest rate. Also assume the SRAS is horizontal at the current price level. a. Write the equations for the IS and LM curves. (These equations express the relationship between r and Y when the goods' and asset mar- kets are in equilibrium.) b. Calculate the full-employment values of output, the real interest rate, the price level, consumption, and investment.Now, consider an economy in which the demand for money is of the formY(1 + it)for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The REAL INTEREST RATE, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the money supply will grow at 2 percent forever, that is,M0 = 100, M1 = 100, M2 = (1.02)M1, M3 = (1.02)M2, and so on. A. Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1,M1 / P1, and, E1π2. B. Find the inflation rate, nominal interest rate, real money balance in period 2,and expected inflation in period 3, given the information available in period 2. (π2, i2, M2 / P2 and E2π3.) C. Find the inflation rate, nominal interest rate, and real money…Assuming that at equilibrium real money supply (M$/P) is equal to real money demand (Md /P), which is assumed to be a function of real income (Y), nominal interest rate (R), and technology (A) as follows: MS Y =A- R P (a) Specify the assumptions needed to uphold the prediction of quantity theory of money claiming that the ratio of money to GDP is constant in the long run.e (b) Assuming that the growth rate of Y is 4%, the growth rate of R is 0, and the growth rate of A is -1%, draw a diagram to indicate the relation between growth rate of MS (on the X-axis) and inflation rate (on the Y-axis).
- Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?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, T = 100. The LM (money market equilibrium) curve is MY P 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 increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), 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…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…
- Suppose the public expects a 7 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will and consumer durable spending will 000 decrease; decrease increase; increase decrease; increase increase; decreaseAssume that investment, government expenditures, taxes are autonomous.C = 2000 + 0.65* (Y-T)I = 900 – 50iG = 400T = 1500M = 1000P = 2L = 0.50Y-25ia.What is the value of the sensitivity money demand to the level of income?b.What is the value of the nominal supply?c.What expression represents the IS curve?d.What is the equilibrium interest rate, i*?e.What is the equilibrium income, Y*?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 G = 500, Ť= 100. The LM (money market equilibrium) curve is M Y P 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 short-run values of (r, i) are determined before the vaccine news shock. 2. Which, if any, of the graphs from Appendix C best depicts the change in the Keynesian cross due to the vaccine news shock? Explain. 3. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the vaccine news shock? Explain. 4. Which, if any, of the graphs…
- C= 1,600+0.6(Y-7) - 2,000r P=2,500-1,000r G=2,000 NX= 50 T= 2,000 The Bank of Lotusland, the central bank, has announced that it will set the real interest rate according to the policy reaction function found in the table below. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 a. For each of the rates of inflation given below, find autonomous expenditure and short-run equilibrium output in Lotusland. Instructions: Enter your responses rounded to whole numbers. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 Autonomous expenditure Equilibrium output Using the data above, graph the AD curve Instructions: in the graph below, use the line tool AD' to draw the aggregate demand line for levels of inflation 4 percent and 0 percent. Draw only the two endpoints.An economy is described by the following equations: Desired consumption cơ = 600 + 0.8(Y- T)- 500r. Desired investment /° = 400 - 500r. Real money demand L = 0.5Y- 200i, for i> 0. Government purchases G and taxes T both equal 1,000. The initial price level P equals 2.0, and expected inflation T İs zero. Full-employment output is 8,000. Notice that the real money demand function above is defined only for positive values of the nominal interest rate. We assume that, when the nominal interest rate equals zero, people are willing to hold as much money as the central bank wishes to supply; this assumption implies that the LM curve becomes horizontal for zero values of the nominal interest rate. a. What is the corresponding real interest rate for the full-employment level of output? r =The supply of credit cards is given by q = 1400X, where X are real credit card balances, q isthe real price of the credit card balance. You also know that R = 0.05 (nominal interest rate)and P = 100. Answer the following questions about this:(a) If the money supply is M s= $5, 000, if P = 100 is the equilibrium price level, find Y (realoutput).(b) Suppose that the Federal Reserve Bank decides to increase the money supply by 10%.How much is the inflation rate as a result? Explain and justify your answer. (c) Further suppose that at the same time, real output, Y , increases by 10%. Now what isthe inflation rate? Does our quantity theory of money hold here? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.