a
To show:Effect on IS and LM curve due to decrease in the expected future real interest rate.
a
Explanation of Solution
A decrease in expected future interest rates will cause the IS curve to shift to the right. It will also cause the LM curve to shift downwards. Since expectations of future interest rates will affect current variables, the LM curve would shift downwards in much the same way as it would under monetary expansion. The IS curve will shift to the right, causing output to increase and the current interest rate to decrease.
Introduction:
IS curve is a graphical representation of goods
LM curve is a graphical representation of
b)
To show:Effect on IS and LM curve due to an increase in the current real policy interest rate
b)
Explanation of Solution
Increasing the current money supply would shift the LM curve downwards. If the expectations of financial market participants do not change, the IS curve will remain the same and output won't change by much. If people expect the future interest rates to change, the IS curve right shift to the right, increasing output by a significant amount.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
c)
To know:Effect on IS and LM curve due to an increase in expected future taxes.
c)
Explanation of Solution
An increase in future taxes will shift the IS curve to the left. The current output will decrease as consumers will have less disposable income to spend on consumption. This will lead to a lower level of output.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
d)
To find:Effect on IS and LM curve due to decrease in expected future income.
d)
Explanation of Solution
A decrease in expected future income will have the same effect as in part (c). The IS curve will shift to the left and lead to a decrease in consumption. Again, a decrease in future income will cause consumers to have less disposable income, leading to a lower level of output.
Introduction:
IS curve is a graphical representation of goods market equilibrium showing combination of interest rate and output level.
LM curve is a graphical representation of money market equilibrium showing combination of interest rate and output level.
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Chapter 16 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- Problem 4. This is an exercise about properties of expectations and variances, which we will use extensively in this course. It is closely related to SW Key Concept 2.3. Suppose you only know the following facts of variances and covariances: If X, Y, and Z are any random variables, and a and b are any constants, then I Var (X+Y) Var (aX) Cov (aX, bY) Cov (X+Y,Z) Cov(a, X) = = = = = Var (X) + Var (Y) + 2Cov (X, Y) a²Var (X) abCov (X,Y) Cov (X, Z) + Cov (Y,Z) 0. Also, you know that if X and Y are independent (I will denote that by X LY) then Cov (X, Y) = 0. For calculations below, please provide precise justification for every step / equality in terms of the given information, and avoid intuitive generalizations. (a) Use the above facts to show another related fact: If Z₁ and Z2 are random variables, and C1 and C2 are constants, then Var (c₁Z₁+c₂Z₂) = cVar (Z₁)+cVar (Z₂)+c1c22Cov (Z₁, Z₂). (b) Use any of the above facts to show that if Z₁ and Z₂ are independent, Var (Z₁ + Z2) = Var (Z₁)…arrow_forward1 Inflation in the period t in the economy is described by the following function Tt -0.3 + 0.06u, + T where T; - inflation in the period t, ut - unemployment in the period t. Inflation expectations are formed adaptively: T = 0.7Tt-1 + 0.37_1, where T is the expected inflation in the period t. Let's assume that initially, in the time period t is equal to TO reduction of the inflation rate to the level of 0.05, starting from the year t: unemployment rate in year t = 0 and in year t = 1. 0, the inflation rate coincides with the level of inflationary expectations and T = 0.1. The Central Bank is conducting a policy of permanent (once and for all) 1. Calculate thearrow_forwardFor the first two blanks: your answer should include only numbers and a decimal. Do not include the %-sign. Round your answer to 1 decimal place if necessary. If the nominal interest rates is 6.6% and the expected real interest rate is 5.1%, then the expected inflation rate is equal to %. Suppose the actual inflation rate is equal to 1.2%. Then the actual real interest rate is equal to %. Relative to the expected inflation rate, the actual inflation rate is good for the but bad for the For both blanks, choose from: borrower, lender It is important that you type in your answers exactly as it appears in the options provided. Quercus is case-sensitive.arrow_forward
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