The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

Chapter 21

The Monetary Policy and Aggregate Demand Curves - all with Video Answers

Educators

Chapter Questions

Problem 1

When the inflation rate increases, what happens to the fed funds rate? Operationally, how does the Fed adjust the fed funds rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

What is the key assumption underlying the Fed's ability to control the real interest rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 3

Why is it necessary for the $M P$ curve to have an upward slope?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

If $\lambda=0,$ what does that imply about the relationship between the nominal interest rate and the inflation rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

How is an autonomous tightening or easing of monetary policy different from a change in the real interest rate due to a change in the current inflation rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement:"I care only about increasing employment; inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 8

"The Fed decreased the fed funds rate in late 2007 even though inflation was increasing. This demonstrates a violation of the Taylor principle." Is this statement true, false, or uncertain? Explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 9

What factors affect the slope of the aggregate demand curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

"Autonomous monetary policy is more effective at changing output when $\lambda$ is higher" Is this statement true, false, or uncertain? Explain your answer.v

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

If net exports were not sensitive to changes in the real interest rate, would monetary policy be more-or less- effective in changing output?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 12

How does an autonomous tightening or easing of monetary policy by the Fed affect the aggregate demand curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 13

For each of the following, describe how (if at all), the IS curve, $M P$ curve, and $A D$ curves are affected.
a. A decrease in financial frictions.
b. An increase in taxes, and an autonomous easing of monetary policy.
c. An increase in the current inflation rate.
d. A decrease in autonomous consumption.
e. Firms become more optimistic about the future of the economy.
f. The new Federal Reserve chair begins to care more about fighting inflation.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 14

What would be the effect of an increase in U.S. net exports on the aggregate demand curve? Would an increase in net exports affect the monetary policy curve? Explain why or why not.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 15

Why does the aggregate demand curve shift when "animal spirits" change?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 16

If government spending increases while taxes are raised to keep the budget balanced, what happens to the aggregate demand curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

Suppose that government spending is increased at the same time that an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 18

"If $\bar{f}$ increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions." Is this statement true, false, or uncertain? Explain your answer.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 19

Assume the monetary policy curve is given by $r=1.5+0.75 \pi$
a. Calculate the real interest rate when the inflation rate is $2 \%, 3 \%,$ and $4 \%$
b. Draw the graph of the MP curve, labeling the points from part (a).
c. Assume now that the monetary policy curve is $r=2.5+0.75 \pi .$ Does the new monetary policy curve represent an autonomous tightening or loosening of monetary policy?
d. Calculate the real interest rate when the inflation rate is $2 \%, 3 \%,$ and $4 \%,$ and draw the new MP curve showing the shift from part (b).

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 20

Use an $I S$ curve and an $M P$ curve to derive graphically the $A D$ curve.

Yujian Zeng

Numerade Educator

Problem 21

Suppose the monetary policy curve is given by $r=1.5+0.75 \pi,$ and the IS curve is $Y=13-r$
a. Calculate an expression for the aggregate demand curve.
b. Calculate the real interest rate and aggregate output when the inflation rate is $2 \%, 3 \%,$ and $4 \%$
c. Draw graphs of the $I S, M P,$ and $A D$ curves, labeling the points in the appropriate graphs from part (b) above.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 22

Consider an economy described by the following:
\[
\begin{aligned}
\bar{C} &=4 \text { trillion } \\
\bar{I} &=1.5 \text { trillion } \\
\bar{G} &=3.0 \text { trillion } \\
\bar{T} &=3.0 \text { trillion } \\
\bar{N} \bar{X} &=1.0 \text { trillion } \\
\bar{f} &=0 \\
m p c &=0.8 \\
d &=0.35 \\
x &=0.15 \\
\lambda &=0.5 \\
\bar{r} &=2
\end{aligned}
\]
a. Derive expressions for the $M P$ curve and $A D$ curve.
b. Calculate the real interest rate and aggregate output when $\pi=2$ and $\pi=4$
c. Draw a graph of the MP curve and $A D$ curve, indicating the points in part (b) above.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 23

Consider an economy described by the following:
\[
\begin{aligned}
\bar{C} &=3.25 \text { trillion } \\
\bar{I} &=1.3 \text { trillion } \\
\bar{G} &=3.5 \text { trillion } \\
\bar{T} &=3.0 \text { trillion } \\
\bar{N} \bar{X} &=-1.0 \text { trillion } \\
\bar{f} &=1 \\
m p c &=0.75 \\
d &=0.3 \\
x &=0.1 \\
\lambda &=1 \\
\bar{r} &=1
\end{aligned}
\]
a. Derive expressions for the $M P$ curve and $A D$ curve.
b. Assume that $\pi=1 .$ What is the real interest rate, equilibrium level of output, consumption, planned investment, and net exports?
c. Suppose the Fed increases $\bar{r}$ to $\bar{r}=2 .$ Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment, and net exports.
d. Considering that output, consumption, planned investment, and net exports all decreased in part
(c), why might the Fed choose to increase $\bar{r}$ ?

Manasvee Singh

Numerade Educator

Problem 24

Consider the economy described in Applied Problem 23
a. Derive expressions for the MP curve and $A D$ curve.
b. Assume that $\pi=2 .$ What is the real interest rate and equilibrium level of output?
c. Suppose government spending increases to $\$ 4$ trillion. What happens to equilibrium output?
d. If the Fed wanted to keep output constant, then what monetary policy change should occur?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Suppose the MP curve is given as $r=2+\pi$, and the IS curve is given as $Y=20-2 r$
a. Derive an expression for the $A D$ curve, and draw a graph labeling points at $\pi=0, \pi=4,$ and $\pi=8$
b. Suppose that $\lambda$ increases to $\lambda=2$. Derive an expression for the new $A D$ curve, and draw the new $A D$ curve using the graph from part (a).
c. What does your answer to part (b) say about the relationship between a central bank's distaste for inflation and the slope of the $A D$ curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator