Assume that b12 and that initially the real interest rate

Reference no: EM13379515

Assume that b=1/2 and that initially the real interest rate is equal to the marginal product of capital at 3%. As well, assume that v=2 and that the inflation rate last period was 2%. Assume the natural rate of unemployment is 5.5%.

a. The Sequester is probably a bad idea. Use the IS-MP model to explain what should happen to the economy if the government cuts spending by 1 percentage point of potential GDP.

b. How much can we expect this to increase the unemployment rate?

c. How much will this change inflation? What will the inflation rate be in the period of the cuts?

d. What was the nominal interest rate last period (before the cuts) if the real rate was equal to the marginal product of capital?

e. What happens to the real rate of interest this period (after the cuts) if the Federal Reserve does nothing to change the nominal rate? What will this do to the economy? Remember that the government has cut spending in question 2a.

f. What does the Federal Reserve have to change the nominal interest rate to in order to close the output gap?

Reference no: EM13379515

Questions Cloud

Qd500-5p and qs2p-60what are the equilibrium quantity and : qd500-5p and qs2p-60what are the equilibrium quantity and price?how much consumer surplus exists in this market?if a 2

John q is planning to buy a bond having a face value of : john q is planning to buy a bond having a face value of 100000 for 90000. the bond is paying 8 per year payable

1 why have economic analyses of clinical and administrative : 1 why have economic analyses of clinical and administrative innovations become more important?2 a clinic finds that by

A firm that manufactures office desks has the following : a firm that manufactures office desks has the following production function in the short runq 400 l0.8 k0.5whereq the

Assume that b12 and that initially the real interest rate : assume that b12 and that initially the real interest rate is equal to the marginal product of capital at 3. as well

Ben bernanke has said that the federal reserve is going to : ben bernanke has said that the federal reserve is going to continue its latest round of quantitative easing until

A consumer product company is considering introducing a new : a consumer product company is considering introducing a new shaving system called delta-4 in the market. the company

1 why might the homo sapiens production possibilities curve : 1. why might the homo sapiens production possibilities curve have shifted outward to the right much more rapidly than

The market for paper in one region of the us is : the market for paper in one region of the us is characterized by the following demand and supply curvesqd160000-2000p

User Account

All Pages