KRUGMAN_WELLS_MACRO_CHAPTER14

The accompanying table shows the annual growth of m1

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Unformatted text preview: 626.5 ? ? 1975 1,638.3 287.1 1,016.2 ? ? 1980 2,789.5 408.5 1,599.8 ? ? 1985 4,220.3 619.8 2,495.7 ? ? 1990 5,803.1 824.8 3,279.2 ? ? 1995 7,397.7 1,127.0 3,641.2 ? ? 2000 9,817.0 1,087.9 4,932.5 ? ? UNCORRECTED Preliminary Edition 4. The accompanying table shows the annual growth of M1 and nominal GDP in Japan during the early 2000s. What must have been happening to velocity during this time? Year M1 growth 8.2% 2.9% 2001 8.5% 0.4% 2002 27.6% −0.5% 2003 8.2% LRAS SRAS P1 E1 AD1 Potential output YE Y1 Real GDP 7. In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession. a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant. Nominal GDP growth 2000 Aggregate price level 2.5% b. If the central bank is instead committed to maintaining an interest rate target of r1, how should the central bank react as the economy slides into recession? 5. An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will interest rates, investment spending, consumer spending, real GDP, and prices change as the monetary policy closes the recessionary gap? Interest rate, r r1 MS1 E1 MD1 LRAS Aggregate price level SRAS Nominal quantity of money, M E1 8. An economy is in long-run macroeconomic equilibrium with an unemployment rate of 5% when the government passes a law requiring the central bank to use monetary policy to lower the unemployment rate to 3% and keep it there. P1 AD1 Y1 YE Potential output a. How could the central bank achieve this goal in the short Real GDP 6. An economy is facing the inflationary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will interest rates, investment spending, consumer spending, real GDP, and prices change as the monetary policy closes the inflationary gap? run? b. What would happen in the long run? 9. According to the European Central Bank website, the treaty establishing the European Community “makes clear that ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.” If price stability is the only goal of monetary policy, explain how monetary policy would be conducted during recessions. Analyze both the case of a recession that is the result of a demand shock and the case of a recession that is the result of a supply shock. UNCORRECTED Preliminary Edition 10. The effectiveness of monetary policy depends on how easy it is for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment spending and the aggregate demand curve. The economies of Albernia and Brittania have very different money demand curves, as shown in the accompanying diagram. In which economy will monetary policy be more effective? Why? (a) Albernia MS1 Interest rate, r r1 CHAPTER 14 367 11. During the Great Depression, businesspeople in the United States were very pessimistic about the future of economic growth and reluctant to increase investment spending even when interest rates decreased. How did this limit the potential for monetary policy to help alleviate the Depression? 12. Using a figure similar to Figure 14-11, explain how the money market and the loanable funds market react to a decrease in the money supply. 13. Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of your answers for the effectiveness of monetary policy in the short run and the long run in influencing real GDP? MD Nominal quantity of money, M (b) Brittania MS1 Interest rate, r r1 M O N E TA R Y P O L I C Y MD Nominal quantity of money, M >web... To continue your study and review of concepts in this chapter, please visit the Krugman/Wells website for quizzes, animated graph tutorials, web links to helpful resources, and more. www.worthpublishers.com/krugmanwells...
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This note was uploaded on 09/09/2009 for the course ECON 701 taught by Professor Charlie during the Spring '09 term at École Normale Supérieure.

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