Chapter 16: Monetary Policy (page 321)
Who are the MPC?
9 economists and the governor of the bank of England.
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In 2009, the inflation rate reached a negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed’s target interest rate back then? Would that rate have been possible given the zero lower bound problem?
a. negative 4.6 percent, not possible.
b. positive 0.4 percent, possible.
c. negative 5.6 percent, not possible.
d. positive 6.4, possible.
What are the components affected in a contractionary monetary policy?
In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate? Would you be surprised to learn that the Fed’s targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?
What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how to combine these two demands graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show how an increase in the total demand for money affects the equilibrium interest rate (no change in the money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.
Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?
Money Supply (\() | Money Demand (\)) | Interest Rate (%) | Investment at Interest Rate Shown (\() | Potential Real GDP (\)) | Actual Real GDP at Interest (Rate Shown) ($) |
500 500 500 500 500 | 800 700 600 500 400 | 2 3 4 5 6 | 50 40 30 20 10 | 350 350 350 350 350 | 390 370 350 330 310 |
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