C = 100 + 0.5 · (Y – Î) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î= 100. The LM (money market equilibrium) curve is M_Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to r = 0.05. Question 4 The CB wants to use open market operations to increase M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices?

C = 100 + 0.5 · (Y – Î) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ĝ = 500, Î= 100. The LM (money market equilibrium) curve is M_Y where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to r = 0.05. Question 4 The CB wants to use open market operations to increase M. Explain what it would have to do, and what would happen to the monetary base B. What would happen to the nominal interest rate i in the short-run? How is it related to bond prices?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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