ECON 221 Lecture 8: ECON221 Lecture 8 CH5

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rubygerbil896

1 Nov 2016

School

Ball State University

Department

Economics

Course

ECON 221

Professor

Shengwu Shang

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Document Summary

Random variable: function that assigns numerical values to outcomes of an experiment, expressed as upper case letters, usually summarizes outcomes of an experiment with numerical values. Random variables have two classifications: discrete: numerical values are countable, continuous: numerical values are not countable, infinite numbers. Probability distribution: probability mass function (pmf): describes discrete random variables, probability density function: describes to describe continuous variables (chapter 6, cumulative distribution function (cmf): describes both discrete and continuous variables. Pmf formula: goes from numbers to numbers. Important probabilities of discrete probability distributions: probability of each value is between 0 and 1 or should be equal, the sum of the probabilities should equal 1, can be seen as a table, graph, or formula. Cmf: probability of a random value is less than or equal to the value of. (cid:4666) (cid:4667) (cid:883) for largest values of in the sample space. (cid:4666) (cid:4667) (cid:882) for smallest values of in the sample space.

Related Questions

XYZ Co. needs to borrow 100 units of country L money, where the interest rate would be equal to 10%. Alternatively, XYZ can borrow in country F, where the interest rate would be equal to 12.75% (if = 12.75%). The current exchange rate (eo) between countries L and F is (CF / CL) = 10, where CF and CL represent equivalent amounts of currency of countries F and L respectively. In other words, one unit of country L currency is equivalent to ten units of country F currency. The loan will be repaid in one year. The uncertainty about the exchange rate next year is expressed as a uniformly distributed random variable (e1) with a lower limit of 95 and an upper limit of 10.5. What is the probability (pr) that XYZ will be better off by borrowing in country F rather than country L? Justify your answer.

yellowduck60

As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.)

A. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.)

B. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as R - R₀= a(P - P₀), where a is a positive constant and P₀a target price level?

C.Suppose the central bankâs policy rule is R - R₀= a(P - P₀) + u, where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action.

13. As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in $4,010 $570.3 $641.0 CHAPTER 15 Money, Interest Rates, and Exchange Rates 383 the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.) a. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.) b. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as where a is a positive constant and a target price level? c. Suppose the central bankâs policy rule is where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action. Compare your story with the one depicted in Figure 15-13. Figure 15-12: http://gyazo.com/3d32377d42b5c9584e17b3c5e40aafaa

Figure 15-13: http://gyazo.com/1fa467e253e320f61da17532fa8d2b58

ECON 221 Lecture 8: ECON221 Lecture 8 CH5

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