EC140 Lecture Notes - Lecture 11: Output Gap, Canadian Dollar, Human Capital

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4 Apr 2016

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Chapter 28 money, interest rates and economic. First payment is equal to the amount of money you need now to ensure yourself that payment in the future. Pv = r1 / (1 + i) The second payment is the value of the irst + the value of the second, and so on. Pv = [r1 / (1+i)] + [ r2 / (1+i) ] + [r3/(1+i)] . If the rate increases the pv falls. If market price > present value quanity demanded is near 0. If market price < present value quanity demanded is very high. Prices adjust unil market value is equal to present value of a bond. Two key features: present value negaively related to interest rates, market price = pv. Increases in interest rates reduce price of bonds. A lower price implies a higher rate of return or bond yield. Bonds at similar rate/maturity, will have a similar yield (price matches coupon rate)

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Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

interest rate rises; investment falls

interest rate rises; investment rises

interest rate falls; investment rises

interest rate falls; investment falls

2. The main goal of monetary policy is to shift

3. Which of the following is true regarding the effects of an expansionary monetary policy?

Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.

Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.

Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.

Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.

You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.

You, the owner of an airline company, sign a two-year contract for airline fuel.

You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

real GDP and price level.

price level and inflation rate.

unemployment rate and inflation rate.

unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.

The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.

Both the short-run and long-run Phillips curves are downward sloping.

Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?

Year	Actual Inflation rate
2010	0%
2011	0%
2012	3%
2013	3%
2014	6%
2015	6%

8. Which of the following can change relatively quickly in the short-run?

the price of a latte in a coffee shop

the salary of a finance professor

the rent paid for a store

copperherring529

Assume that the Federal Reserve (%u201Cthe Fed%u201D) unexpectedly shifts to restrictive monetary policy. Why would the Fed make such a policy shift? Explain how the Federal Reserve will implement this restrictive monetary and how the effects of this policy will ripple through the economy to impact real output both in the short run(SRAS) and in the long run (LRAS).

Using the Federal Reserve%u2019s report (see link below) on Money Stock Measures for June 7, 2012 determine the growth rate of the Seasonally Adjusted M1 Money Supply between January 2011 and January 2012. State the rate of growth as a percent of January 2011 Seasonally Adjusted M1 Money Supply. Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why. Link to report: http://www.federalreserve.gov/releases/h6/

Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

What is the Quantity Theory of Money? What are its implications? Does the theory have any shortcomings, if so what are they? Have the predictions of the Quantity of Theory of Money proven accurate?

EC140 Lecture Notes - Lecture 11: Output Gap, Canadian Dollar, Human Capital

EC140 Full Course Notes

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