PS8_Ans - . Q4 Slide 30. Q5 The question implies that the...

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Assessment 8 1 D 2 D 3 B 4 B 5 A 6 C 7 B 8 D 9 C 10 B Suggested explanations to selected questions: Q1 Loanable funds market model (slide 23, Ch. 9) Æ determination of real interest rate ( r* ) through the demand and supply of ‘loanable funds’. Money market model (slide 11, Ch. 14) Æ determination of ‘short term nominal interest rate ( i*) [in particular, it is the i for a short term financial assest, T-bill] through the Money Demand and the Money Supply curves. Q2&3 Be noted, the model in slide 11 is used to explain how monetary policies affects equilibrium interest rate (i*) ; while the static AD-AS in slide 20 AND the dynamic AD-AS in slide 21 is used to explain how monetary policies affect equilibrium real GDP and equilibrium P-level
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Unformatted text preview: . Q4 Slide 30. Q5 The question implies that the economy is initially over-heated and needed a contractionary monetary policy. ‘Does too late’ means that the economy might have been restored to its potential GDP when the Fed did it. As a result, ‘too large a decrease in GDP’ is observed. (see slide 31 for the opposite case). Q6 Slide 32. Q7 Slide 33. Q8 Slide 34. Q9 Slide 36. Q10 It is more likely for the Gov’t to persuade the Fed to increase Money Supply (in order to increase GDP) rather than to persuade the Fed to decrease Money Supply (in order to fight inflation). Remember, a contractionary monetary policy will always bring a drop in real GDP despite the fact that it can fight inflation....
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