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91Ó°ÊÓ

Assume that the monetary policy curve is given by

r = 1.5 + 0.75p.

a. Calculate the real interest rate when the inflation rate

is 2%, 3%, and 4%.

b. Draw a graph of the MP curve, labeling the points

from part (a).

c. Assume now that the monetary policy curve is given

by r = 2.5 + 0.75p. Does the new monetary policy

curve represent an autonomous tightening or loosening

of monetary policy?

d. Calculate the real interest rate when the inflation rate

is 2%, 3%, and 4%, and draw the new MP curve,

showing the shift from part (b).

Short Answer

Expert verified

A.


B.

C. As the increased affectedness rate also added the real claim class caused the fiscal course arc move above thereby aiding the frugality to catch and affectedness to slip.

D. The graph below shows the Derivation of MP curve with new given monetary policy curve. Where axis represents increasing real charge per unit and Y represents increasing rate. The upward slope of the MP curve shows the reaction of the financial organization to a higher rate by increasing the important interest rates.

Step by step solution

01

Concept Preface 

Preface Affectation rate refers to the rate at which prices of the frugality rises over time performing in a fall in the purchasing power. It's being calculated using the rise in the price of a defined handbasket of product. The central bank always attempts to confine affectation and maintain a strategic distance from deflation in order to keep the frugality balanced.
The real claim class is the class of claim an investor, saver or lender receives in the wake of holding into account affectedness. It can be delineated again formally by the Fisher equation, which expresses that the real claim rate is about the formal interest rate minus the affectedness class.

02

Explanation of Solution

A.

Contributed pocket course arc as r=1.5+0.75Ï€

Where,

- ris the authentic claim class

- πis affectedness class.

When πis 2 :

role="math" localid="1647468699606" r=1.5+0.75(2)=1.5+1.5=3.0%

When πis 3 :

role="math" localid="1647469665558" r=1.5+0.75(3)=1.5+2.25=3.75%

When πis 4 :

r=1.5+0.75(4)=1.5+3.0=4.5%

03

:Explanation of Result 

B. Derivative of MP arc with given affectedness point is shown in the number below,

In the said graph,Xa block represents authentic claim class and Yblock represents affectedness class. The upward grade of the MP arc shows the answer of the halfway bank to the developed affectedness class by adding the real claim classes.

04

Explanation of Result 

C. The new financial course arcr=2.50.75Ï€ shows a self-governed tight of the fiscal course to lower the affectedness class.
As the increased affectedness rate also added the real claim class caused the fiscal course arc to move above thereby aiding the frugality to catch and affectedness to slip.

05

Explanation of Result 

D.

Contributed pocket course arc as r=1.5+0.75Ï€

Where,

- ris the authentic claim class

- πis affectedness class.

When πis 2 ,

r=1.5+0.75(2)=1.5+1.5=3.0%

When πis 3 ,

r=1.5+0.75(3)=1.5+2.25=3.75%

When πis 4 ,

r=1.5+0.75(4)=1.5+3.0=4.5%

The graph under shows the derivative of MP arc with the new given fiscal course arc. Where block represents adding authentic claim class and yrepresents adding affectedness class. The upward grade of the MP arc shows the answer of the intermediary bank to forward affectedness class by adding the authentic claim classes.

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Most popular questions from this chapter

Suppose the monetary policy curve is given by r=1.5+0.75Ï€, and the IS curve is given by Y=13-r.

a. Calculate an expression for the aggregate demand curve.

b. Calculate the real interest rate and aggregate output when the inflation rate is 2%, 3%, and 4%.

c. Draw graphs of the IS, MP, and AD curves, labeling the points from part (b) on the appropriate graphs.

Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?

Consider an economy described by the following:

C = \(3.25 trillion

I = \)1.3 trillion

G = \(3.5 trillion

T = \)3.0 trillion

NX = -$1.0 trillion

f = 1

mpc = 0.75

d = 0.3

x = 0.1

l = 1

r = 1

a. Derive expressions for the MP curve and the AD

curve.

b. Assume that p = 1. Calculate the real interest

rate, the equilibrium level of output, consumption,

planned investment, and net exports.

c. Suppose the Fed increases r to r = 2. Calculate the

real interest rate, the equilibrium level of output,

consumption, planned investment, and net exports

at this new level of r.

d. Considering that output, consumption, planned

investment, and net exports all decreased in part (c),

why might the Fed choose to increase r?

Consider an economy described by the following:

C=\(4trillionI=\)1.5trillionG=\(3.0trillionT=\)3.0trillionNX=$1.0trillionf=0mpc=0.8d=0.35x=0.15λ=0.5r=2

(a) Derive expressions for the MP curve and the AD curve.

(b) Calculate the real interest rate and aggregate output whenπ=2andπ=4

(c) Draw a graph of the MP curve and the AD curve, labeling the points given in part (b).

If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output?

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