UCI- Spring 2011 Econ 100 C Prof El Hag Additional Practice Exercises for the Final 1. Explain whether it is possible for the nominal interest rate to increase while the real interest rate simultaneously decreases. ANS: The nominal interest rate is determined in financial markets. The real interest rate is approximately equal to i - π e where π e is expected inflation. When i increases, r can fall if the increase in expected inflation exceeds the rise in i. 2. Using the IS-LM model, graphically illustrate and explain what effect an increase in money growth will have on output, the nominal interest rate, and the real interest rate in the short run. ANS: An increase in money growth will cause the LM curve to shift down. This will lower the nominal rate. Assuming expected inflation does not change, the real rate will fall by the same amount. Investment will increase causing an increase in demand and output. 3.
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