Chapter 16: Q.2 Critical Thinking Questions (page 365)
What do you think might be lost-and by whom - if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.
It would be everyone's loss.
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On the basis of Problem 16-1, imagine that initially the market interest rate is 5 per cent and at this interest rate you have decided to hold half of your financial wealth like bonds and half as holdings of non-interest-bearing money. You notice that the market interest rate is starting to rise, however, and you become convinced that it will ultimately rise to 10 per cent.
a. In what direction do you expect the value of your bond holdings to go when the interest rate rises?
b. If you wish to prevent the value of your financial wealth from declining in the future, how should you adjust the way you split your wealth between bonds and money? What does this imply about the demand for money?
Consider the following data: The money supply is \(1 trillion, the price level equals 2, and real GDP is \)5 trillion in base-year dollars. What is the income velocity of money?
Consider the data in Problem 16-10. Suppose that the money supply increases by $ 100 billion and real GDP and the income velocity remain unchanged.
a. According to the quantity theory of money and prices, what is the new equilibrium price level after full adjustment to the increase in the money supply?
b. What is the percentage increase in the money supply?
c. What is the percentage change in the price level?
d. How do the percentage changes in the money supply and price level compare?
Take a look at Figure 16-6. Suppose that a multiple reduction in GDP is the final outcome that the Fed desires in the last box in the figure. Explain the required directions of efforts - that increases or decreases - that most occur in the preceding boxes in the figure in order to yield in this desired decrease in real GDP
Suppose that, initially, the U.S. economy was in an aggregate demand-aggregate supply equilibrium at point A along with the aggregate demand curve AD in the diagram below. Now, however, the value of the U.S. dollar suddenly appreciates relative to foreign currencies. This appreciation happens to have no measurable effects on either the short-run or the long-run aggregate supply curve in the United States. It does, however, influence U.S. aggregate demand.
a. Explain in your own words how the dollar appreciation will affect net export expenditures in the United States.
b. Of the alternative aggregate demand curves depicted in the figure- versus which could represent the aggregate demand effect of the U.S. dollar's appreciation? What effects does the appreciation have on real GDP and the price level?
c. What policy action might the Federal Reserve take to prevent the dollar's appreciation from affecting equilibrium real GDP in the short run?
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