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Chapter 21: Q 16. (page 566)
When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
It will cause downward & rightward movement along the IS curve, denoting more output at lower interest rates.
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If the consumption function is C = 100 + 0.75YD, I = 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output?
What will happen to aggregate output if government spending rises by 100?
Why does equilibrium output increase as the marginal propensity to consume increases?
Assume that autonomous consumption is \(1,625 billion and disposable income is \)11,500 billion. Calculate consumption expenditure if an increase of \(1,000 in
disposable income leads to an increase of \)750 in consumption expenditure
Go to the St. Louis Federal Reserve FRED database, and find data on Real Private Domestic Investment (GPDIC1), a measure of the real interest rate; the 10-year Treasury Inflation-Indexed Security, TIIS (FII10); and the spread between Baa corporate bonds and the 10-year U.S. treasury (BAA10YM), a measure of financial frictions. For (FII10) and (BAA10YM), convert the frequency setting to 鈥渜uarterly,鈥� and download the data into a spreadsheet. For each quarter, add the (FII10) and (BAA10YM) series to create ri , the real interest rate for investments for that quarter. Then calculate the change in both investment and ri as the change in each variable from the previous quarter.
a. For the eight most recent quarters of data available, calculate the change in investment from the previous quarter, and then calculate the average change over the eight most recent quarters.
b. Assume there is a one-quarter lag between movements in ri and changes in investment; in other words, if ri changes in the current quarter, it will affect investment in the next quarter. For the eight most recent lagged quarters of data available, calculate the onequarter-lagged average change in ri .
c. Take the ratio of your answer from part (a) divided by your answer from part (b). What does this value represent? Briefly explain.
d. Repeat parts (a) through (c) for the period 2008:Q3 to 2009:Q2. How do financial frictions help explain the behavior of investment during the financial crisis? How do the coefficients on investment compare between the current period and the financial crisis period? Briefly explain.
Why do increases in the real interest rate lead to decreases in net exports, and vice versa?
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