PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 9RQ
To determine
The impact of tight
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Three countries are in a currency union. The countries are identical in that each has the same
equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each
country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for
the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an
increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter
8, Section 2.2 and may wish to review Chapter 8, Section 2.4.)
Table 1 Information about three countries
Country A
Country B
Country C
Equilibrium output
£50 billion
£50 billion
£50 billion
Equilibrium real
2%
2%
2%
interest rate
Inflation rate
2%
5%
9%
Select one:
O Country A
O Country B
O Country C
MacBook
80
DIN
F1
F2
F3
F4
F5
F6
F7
FE
@ €
£ #
$
&
*
2
3
4
7
8.
Q
W
E
R
Y
CO
The monetary policy rate is the rate at which the Central Bank of Ghana lends to commercial banks. The results from table 4.4.1 shows that the monetary rate in Ghana declined from 2019 to 2021, before rising in 2022. The decline in the monetary rate from 2019 to 2021 can be attributed to an expansionary monetary policy, which was implemented to boost the economy of Ghana by reducing unemployment. The rise in the monetary rate in 2022 is a sign of a contractionary monetary policy, which is intended to reduce money supply and increase the cost of borrowing. This can help control inflation but may also lead to lower economic growth due to reduced aggregate demand (consumption). Consumption which is a component of GDP, the decrease in Aggregate demand will lead to decrease GDP and economic growth at large.
Digitalization has become the norm in all parts of life, including finance. Mobile money has acquired substantial acceptance in Ghana as a simple mechanism for fund transfers, payments,…
On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate in Europe by half a percentage point, to 2 percent. The bank’s president at the time, Willem Duisenberg, suggested that, in the future, the bank could reduce rates further. The rate cut was made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the economy? Be specific. What was the hoped-for result on C, I, and Y?
Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 15.A - Prob. 15A.1CCCh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Why, in the absence of public beliefs that the...Ch. 15 - Prob. 9RQ
Ch. 15 - Prob. 10RQCh. 15 - Prob. 1PCh. 15 - For the economy in Problem 1, suppose that...Ch. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - For each of the following, use an AD-AS diagram to...Ch. 15 - Prob. 6PCh. 15 - Suppose that a permanent increase in oil prices...Ch. 15 - An economy is initially in recession. Using the...Ch. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 15.1CCCh. 15 - Prob. 15.2CCCh. 15 - Prob. 15.3CCCh. 15 - Prob. 15.4CCCh. 15 - Prob. 15.5CCCh. 15 - Prob. 15.6CCCh. 15 - Prob. 15.7CCCh. 15 - Prob. 15.8CCCh. 15 - Prob. 15.9CCCh. 15 - Prob. 15.10CC
Knowledge Booster
Similar questions
- In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a “soft patch” in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary. a. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession? b. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.arrow_forwardThe Federal Reserve System was established to provide a stable monetary system for the entire economy. The Federal Reserve Bank (the Fed) has three major tools to control the money supply: 1) reserve requirements, 2) discount window for loans to member banks, and 3) open market operations. When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy? Suppose the Federal Reserve purchases a $100,000 bond from John Doe, who deposits the proceeds in the Manufacturer's National Bank; what will be the impact of this transaction on the supply of money? How do each of the Fed's tools work?arrow_forwardPolicies and Policymakers “Bank Indonesia (BI) has emphasized that it will not print money to help fund the surge in government spending to fight the COVID-19 pandemic. BI Governor Perry Warjiyo said the suggestion to print money was not a prudent monetary policy, pledging that the central bank would never take the measure. “This is an unusual policy and BI will never take such measures, including giving out money to the general public to face the COVID-19 pandemic,” Perry told reporters on Wednesday. “I am very sorry, but we should not confuse the public.”” -The Jakarta Post Why did BI decide on the prudent policy, which is to not to print money despite the fear of economic recession due to Covid-19 pandemic? What are other policy options for a central bank during the crisis?arrow_forward
- The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = P x Q. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (M x V) = Percentage Change in (PxQ) You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the following equation, let "%A" stand for "percentage change in": %AM+%AV = %AP+%AQ For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate. of 5% per year, you can use this…arrow_forwardThe quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (Mx V) = = You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the following equation, let "%A" stand for "percentage change in": %AM+%AV = = Percentage Change in (PxQ) %AP+%AQ For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate of 5% per year, you can use this…arrow_forwardAccording to your graph, the equilibrium value of money is (0.25, 0.50, 0.75, 1.00) therefore the equilibrium price level is (1.00, 1.33, 2.00, 4.00). Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion. In order to reduce the money supply, the Fed can use open market operations to (sell bonds to – buy bonds from) the public. Use the purple line (diamond symbol) to plot the new money supply (MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is (greater – less) than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will (increase – reduce) people’s demand for goods and services. In the long run, since the economy’s ability to produce goods and services has not changed, the prices of goods and services will (rise – fall) and value of money will (rise – fall)arrow_forward
- Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?arrow_forwardConsider two countries, Canada (Home) and US (Foreign). In 2018, Canada experienced relatively slow output growth (2%), whereas US had relatively robust output growth (4.2%). Suppose the Bank of Canada allowed the money supply to grow by 2% each year, whereas the Federal Reserve (Fed), the US central bank, chose to maintain relatively high money growth of 10% per year. For the following questions, use the simple monetary model (where L is constant). A. Using time series diagrams, illustrate how this increase in the money growth rate affects the US money supply, interest rate, prices, real money supply, and exchange rate Esics over time. (Plot each variable on the vertical axis and time on the horizontal axis.)arrow_forwardThe Bank of England will prevent members of its interest rate-setting committee from publishing individual opinions on the economy despite a review of its procedures calling for greater transparency. The Bank said a "collective forecast" will remain the centerpiece of the monetary policy committee's monthly reports, effectively barring members from explaining their own views on the likely path of economic growth, inflation, and unemployment. Critics of the Bank's policy said the Bank's governor, Sir Mervyn King, had rejected proposals for the public to see a wider range of views because he wanted to maintain a stranglehold on the direction of policy...In response, the Bank said it agreed some procedures were opaque and there was a need for clear lines of responsibility, but said that criticism of the monetary policy committee, which King chairs, were largely unfounded. Explain why then-Bank of England Governor Mervyn King would want to prevent members of the monetary policy committee…arrow_forward
- Q7.On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.arrow_forwardAs a response to high inflation, in March 2022, the Federal Reserve System (Fed) approved its first interest rate hike since December 2018. However, inflation rate still remained very high and piked in June 2022. The last time inflation ran that high was in the 1980s. To bring down inflation, the Fed implemented more restrictive monetary policy and approved another interest rate hike of 0.75 percent in November 2022. The Fed decided to maintain the federal funds rate at a target level of 4%. What the Fed need do to achieve a higher target federal funds rate (how to implement monetary policy)? If CPI increased from 287.7 in the 2nd quarter (Q2) 2022 to 298.1 in the 3rd (Q3) 2022. Using CPI-based inflation rate, how much is real interest rate if the Fed sets nominal interest rate at 4%. Note: we assume velocity of money supply is constant.arrow_forwardIn 1992, several European countries had their individual currencies pegged to the ECU (a pre-cursor to the euro) in anticipation of forming a common currency area. In practice, this meant that countries were pegged to the German deutschmark (DM). This question considers how two different countries responded to the European Exchange Rate Mechanism (ERM) Crisis. For the following situations, you need only consider short-run effects. Also, treat Germany as the foreign country. (a) Following the economic consequences of German reunification in 1990, the Bundesbank (Germany’s central bank) raises its interest rate. On September 14, 1992, Great Britain decided to float the British pound (£) against the DM. Using the foreign exchange market, the money market, and treating Britain as the home country, graphically illustrate the effects of Germany increasing its interest rate on Great Britain. (b) After Britain abandoned the ERM (e.g., allowed its currency to float against the DM), investors…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
