Question

explain clearly the rationale behind your numerical answers.

a. suppose the multiplier is 1.5, the income multiplier with respect to the money supply is 2, the money multiplier is 4.5, and a central bank purchase of $6b of bonds during a recession drops the interest rate by one percentage point. suppose that to fight a recession, monetary policy is undertaken to lower the interest rate by two-thirds of a percentage point. what should happen to the income level?

b.suppose the short run Phillips curve is duch that a two-percentage point increase in inflation decreases unemployment by one percentage point. suppose the economy is in long run equilibrium with a real growth rate of 2% and an unemployment rate of 7% and the central bank increases the rate of growth of the money supply from 5% to 8%. when the economy has reached its new long run equilibrium, what will be the levels of inflation and unemployment?

c.suppose that in equilibrium the Canadian dollar is depreciating relative to the U.S. dollar by 5% per year. suppose changes in the U.S. cause the U.S. real interest rate to rise from 3.5% to 4.5% and the U.S inflation rate to increase from 4% to 6%. assuming a risk premium of one percentage point, after the canadian economy has settled to a new equilibrium, what is its nominal interest rate?

Answer 1