MGEA06H3 Study Guide - Final Guide: Real Interest Rate, Money Supply, Interest Rate

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greygoat862

13 Dec 2018

School

UTSC

Department

Economics for Management Studies

Course

MGEA06H3

Professor

Iris Au

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MGEA06H3 Full Course Notes

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Use the is-lm model to illustrate graphically and briefly explain the impact of these effects on output and real interest rate in the short-run. Suppose the economy is currently producing above its full (lr) capacity. Knowing that you are an expert in macroeconomics, government policy makers want you to suggest a policy that would bring the economy back to full-employment and, at the same time, does not allow the level of investment to decrease. Explain with the aid of one well labeled is-lm diagram. Interest rate targeting will lead to a larger change in output than money supply targeting if the economy experiences an increase in autonomous investment. is this statement true, false, or. Explain with the aid of one well labeled is-lm diagram (compare your answer to initial equilibrium).

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Suppose that the chairman of the Federal Reserve Board decides to intervene in the economy at the Federal Open Market Committee Meeting, increasing short term interest rates

) Now state in words the impact in the economy in the short run. In particular, explain what will happen in the goods markets and in the money markets. What are the final effects of this policy on prices and output in the short run? Explain what the monetary mechanism is in this context.

(d) Use the IS-LM diagrams to graphically illustrate the impact of a Federal Reserve decision in the long run. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift, v. the long-run equilibrium values.

(e) Now state in words the impact in the economy in the long run. What is the key variable that links the short run to the long run, and how in this case? What are the final effects of this policy on prices and output in the long run? Explain what the Classical dichotomy is in this context.

(f) Draw a graph showing the effect of this policy on real GDP over time, that is, a graph showing the economic fluctuation in the short run and in the long run (GDP real in the Y-axis and time in the X-axis).

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The following equations describe an economy. Refer to equation (8) on page 247, equation (9) on page 248 and equation (23) on page 212 may also help in 12th edition Dornbusch, Fischer, Startz.

IS Function

C=600+(.7) (1-t) y

t= .15

l = 1500-75 (i)

l = 6 (6%)

G = 1000

LM Function

L=.3Y-65 (i)

M/P = 900

a.) what is the equali brium income level and rate of interest?

b.) Suppose there is an increase in t from .15 to .20 . What will be the change in the equilibrium level of income and interest rate?

c.) Suppose there is a decrease in government expenditures (G) from 1000 to 800 given the parameters given in part "a" what will be the new equilibrium income leel and interest rate?

d.) Suppose there is an increase in the money supply from 900 to 1200 given the parameters given in part "a" what will be the new equilibrium level of income and interest rate?

e.) Today Congress and the President are debating the correct economic policy to attain a full employment level of production, price stability and a balanced budget. Here are the 3 proposals:

i: Cut Government expenditures (G) while keeping taxes fixed

ii. Increase the tax rate t while keeping government spending G fixed.

iii. Increase the tax rate t and decrease goverenment spending G

Given your answer in a - e above, what econ omic policy would you advise be implemented? Explain your position completely.

Which of the following is NOT a tool the Fed uses to manage the money supply? A) open market operations B) discount policy C) deposit insurance D) reserve requirements 0.4 points Question 2 The problem with barter economies is that they require A) less time and trouble to trade as compared with a money economy. B) that there be a double coincidence of wants. C) a banking system for trade to occur. D) that there be a single coincidence of wants. 0.4 points Question 3 If banks do not loan out all their excess reserves then the real world multiplier is A) smaller than 1/RR. B) larger than 1/RR. C) equal to 1/RR. D) not related to 1/RR. 0.4 points Question 4 If the Federal Open Market Committee wants to increase the money supply through open market operations it will A) buy U.S. Treasury Securities. B) sell U.S. Treasury Securities. C) increase the discount rate. D) decrease the discount rate. 0.4 points Question 5 M1 includes A) currency in circulation, checking account balances at banks, the value of traveler's checks. B) currency in circulation, savings accounts, checking account balances at banks. C) currency in circulation, savings accounts, checking account balances at banks, traveler's D) coins, savings account balances at banks, traveler's checks. 0.4 points Question 6 Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. 0.4 points Question 7 According to the quantity theory of money, the inflation rate equals A) the money supply minus real output. B) real output minus the money supply. C) the growth rate of the money supply minus the growth rate of real output. D) the growth rate of real output minus the growth rate of the money supply 0.4 points Question 8 Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in book/lecture slide. Correct answers contain no decimals. Please report them as they are. a) What is the total change in checking account deposits? Total change in checking account deposits is Blank 1 . b) How much new money is created? (or what is the change in money supply given the above state conditions?) Total change in money supply is Blank 2 . c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Blank 3 than in the real world.

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MGEA06H3 Study Guide - Final Guide: Real Interest Rate, Money Supply, Interest Rate

MGEA06H3 Full Course Notes

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