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1. For this problem assume that the economy is initially at potential. Inflation is 3% and the real interest rate is equal to the marginal product of capital, which is 4%. As well, when the economy is at potential unemployment is 5%. Finally, v=1/2 and b=2. The questions need graphs, equations and a brief written explanation. a. What is the nominal interest rate when the economy is at potential? b. Now suppose a sudden drop in the stock market causes a decline in the share of investment equal to 2% of potential output. What happens to the output gap? c. What is the unemployment rate now? d. What is the inflation rate? What is the change in inflation? e. If the Fed does not change the nominal interest rate in response to the decline in investment what will happen to the real rate and output? What is the unemployment rate now? f. What does the Fed have to change the nominal interest rate to in order to bring the economy back to potential? 2. For this problem assume that the economy is initially at potential. Inflation is 2% and the real interest rate is equal to the marginal product of capital, which is 3%. As well, when the economy is at potential unemployment is 6%. Finally, v=1/2 and b=1. The questions need graphs, equations and a brief written explanation. a. Suppose fears of economic sanctions-in response to the US annexing Quebec-cause the financial system to demand a risk premium of 4% above the risk free real rate. What will this do to the economy? b. What will this do to the unemployment rate and the inflation rate? c. How low can the Federal Reserve lower the real rate in response? What is output now? d. How can the government bring the economy back to potential? 3. HARD QUESTION For this problem, assume that the economy is initially at potential. Inflation is 3% and the real interest rate is equal to the marginal product of capital, which is 4%. As well, when the economy is at potential unemployment is 5%. Finally, v=1 and b=2. The questions need graphs, equations and a brief written explanation. a. If a war suddenly breaks out, and that causes an increase in military spending of 5% of potential l GDP, what will the inflation rate be this year (one period=one year) b. If the Fed takes no action to offset the increased military spending and the spending continues for many years what will the inflation rate be next year and for each of the following two years (i.e. time t+1, t+2, and t+3)? c. If the war only lasts for one year and at the end of that year the increase in military spending evaporates, what will the inflation rate be next year (i.e. time t+1)
Does this case illustrate the law of diminishing marginal productivity and in this case, less and less of a single factor, labor, is being used. Does this have anything to do with the law of diminishing marginal utility?
Suppose the Federal Reserve announced that it would pursue contractionary monetary policy to reduce the inflation rate. Would the following conditions make the ensuing recession more or less severe.Wage contracts have short durations.
a consider the following price indexes 90 in 2009 100 in 2010 110 in 2011 and 121 in 2012. answer the following
Which of the following is not one of the explicit functions of the Federal Reserve granted by Congress.
general cereals is using a regression model to estimate the demand for tweetie sweeties a whistle shaped sugar-coated
assume the market price of natural gas is 6.40 per mcf thousand cubic feet and production and consumption of gas are 23
What conditions must be met for buyers to bear the full burden of a tax? What conditions would cause sellers to bear the full burden? Explain.
What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important?
The demand for a specific brand of toothpaste and the demand for toothpaste in general b. The demand for gasoline in the short run and the demand for gasoline in the long run
Airphone, Corporation Produces cellular telephones at a processing cost of $47 each unit. The firm manufactures an average of 250 phones per week and has a yield of 87 percent good-quality phones
do some research on the country of ethiopia and discuss1. who in the ethiopian society has the most difficult time
Discuss how the article relates to concepts & theories (international investment) examined (clearly note the concepts & theories being illustrated)
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