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ECO100Y5 Lecture Notes - Lecture 16: Nominal Interest Rate, Real Interest Rate, Maryland Route 3

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beigelion584
18 Mar 2019
School
UTM
Department
Economics
Course
ECO100Y5
Professor
Yindok

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Tutorial 16/ chapter 14 and 15 from macroeconomics / no tutorial quiz this week: money market and monetary policy. Suppose the economy-wide demand for money is given by: md = p(0. 2y 25,000i), where y is real gdp, P is the price level and i is nominal interest rate. Md = 3 (0. 2 x 10,000 25,000 x 4%) Md = 3 (0. 2 x 10,000 25,000 x 6%) Money supply = 150: monetary policy and output stabilization. An economy is described by the following equations: = 2,600 + 0. 8 (y t) 10,000r. Notations: c is consumption, t is net taxes, i investment, g government spending, and r is the real interest rate. Assume that prices are fixed for the time being. Notice that c and i are now functions of the real interest rate. Higher r discourages c and i: solve for the short-run equilibrium output if the real interest rate is 10%.

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Related Questions

The income elasticity of money demand is 4/5 while the interest elasticity is -0.2 (minus 20%). Real income is expected to grow by 2.5% over the next year, and the nominal interest rate is expected to grow by 20%.

a. What is the expected inflation rate if the Central Bank maintains the growth rate of the money supply at 4%?

b. The central bank wants to set the growth rate of the nominal money supply in order to attain a 4% expected inflation rate. What should that growth rate be?

In a third world country, the central bank wants to reduce the inflation rate by 5%. The current money supply is $2.0 trillion and the goal is to have equilibrium in the money market (Ms=Md). What should be the new target interest rate to reduce the inflation rate by 5% and to keep the money market in equilibrium? Use the quantity theory of money model (M*V=P*Y, or M*V=P*Q) and assume that V and Y (or Q) are constant. The estimated money demand function is given as:

Md = 10-0.7i.

Macroeconomics (7th edition) by Olivier Blanchard

10. Monetary policy in a liquidity trap
Suppose that money demand is given by Md = $Y(0.25 - i) as long as interest rates are positive. The questions below then refer to situations where the interest rate is zero.

a. What is the demand for money when interest rates are zero and $Y = 80?

b. If $Y = 80, what is the smallest value of the money supply at which the interest rate is zero?

c. Once the interest rate is zero, can the central bank continue to increase the money supply?

d. The United States experienced a long period of zero interest rates afer 2009. Can you find evidence in the text that the money supply continued to increase over this period?

e. Go to the database at the Federal Reserve Bank of St. Louis known as FRED. Find the series BOGMBASE (the monetary base) and look at its behavior from 2010 to 2015. What happened to the monetary base? What happened to the federal funds rate in the same period?