ECON 200 Problem Set 7 Fall 2007

ECON 200 Problem Set 7 Fall 2007 - of the ATM which allows...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Due at the beginning of class on November 8, 2007 Economics 200 Macroeconomic Theory Problem Set 7 1. Comment on the claim made by a reporter in the early 1980s who wrote that “[a] new recession is feared because higher Pentagon spending is raising interest rates. Those higher rates are discouraging housing purchases and plant and equipment investment.” 2. (a) Suppose that consumers go on a “consumption binge” which we can model as rise in the autonomous part of consumption. (i) Draw a diagram showing the effects of this on the interest rate and GDP if the Fed keeps the money supply fixed. Be sure to fully explain your answer. (ii) Draw a diagram showing the effects of this on the interest rate and GDP if the Fed changes the money supply as needed to keep the interest rate constant. (b) Suppose that there is a decrease in the demand for money due to the invention
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: of the ATM which allows individuals to reduce their average holdings of cash. (i) Draw a diagram showing the effects of this on the interest rate and GDP if the Fed keeps the money supply fixed. Be sure to fully explain your answer. (ii) Draw a diagram showing the effects of this on the interest rate and GDP if the Fed changes the money supply as needed to keep the interest rate constant. (c) Suppose now that the goal of the Fed is to stabilize GDP and that it is considering two alternative approaches to monetary policy. The first is a policy of holding the money supply constant. The second is a policy of changing the money supply as needed to keep the interest rate constant. Use the results in parts (a) and (b) to advise the Fed regarding this choice....
View Full Document

This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.

Ask a homework question - tutors are online