Homework%204 - market participants expect the nominee to be...

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Econ 3080-003 Homework Assignment 4 April 18, 2011 Due: Monday, April 25, 2011 From Chapter 17: 1. For each of the changes in expectations listed below, determine whether there is a shift in the IS curve, LM curve, both or neither. Assume that expected current and future inflation are zero and no other exogenous variable is changing. (a) a decrease in the expected future real interest rate (b) an increase in the current money supply (c) an increase in expected future taxes (d) a decrease in expected future incomes 1
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2. Suppose that The Federal Reserve chairman unexpectedly announces that he will retire in one year. At the same time the president announces a nominee to replace the Fed chair. Financial
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Unformatted text preview: market participants expect the nominee to be confirmed and also believe the nominee will conduct a more contractionary monetary policy in the future. Consider the present to be the last year of the current Fed chair’s term and the future to be the time after that. Given that monetary policy will be more contractionary in the future, what will happen to future interest rates and future output (at least for a while, until output returns to its medium run level)? Given that these future effects are predicted, what will happen to output and the interest rate in the present? What will happen to the yield curve on the day the retirement announcement happens? 2...
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Homework%204 - market participants expect the nominee to be...

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