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- (e) The current rate of inflation exceeds the target inflation rate by 2 percent and there are no shocks to the economy. If m= 0.25, 60.5, and 0.5, what is the change in inflation? =a) Assume that the nominal return on U.S. government T-bills was 10% during 2002, when the rate of inflation was 6%. The real risk-free rate of return on theseT-bills was: b) When individuals believe they have sufficient income and assets to cover their expenses while maintaining a reserve for uncertainties, they are most likely in the phase of the investment life cycle. gifting B. consolidation C. accumulation D. spending c) Find the duration of a 3-year bond with annual coupon payments of $80 and a par value of $1,000. The current market price of the bond is $950.25. If the YTM of the bond dropped by 1%, what would happen to the bond price?Suppose that an economy has a constant nominal money supply, a constant level of real output Y = 1500, and a constant real interest rate r = 0.05, and it’s expected rate of inflation is 2%, i.e, πe = .02. Suppose that the income elasticity of money demand is ηY = 0.5 and the interest elasticity of demand ηi = –0.2. (a) Suppose that Y decreases to 1425, r remains constant at 0.05 and there is no change in the expected rate of inflation. What is the percentage change in the equilibrium price level? (b) Suppose that r increases to 0.06 and Y remains at 1500. Assuming that expected inflation remains at πe = .02, what is the percentage change in the equilibrium price level? (c) Suppose that r increases to 0.06. Assuming that πe = .02, what would real output have to be for the equilibrium price level to remain at its initial value?
- 14. If the expected inflation rate is 5% and negotiators agree that the real wages should rise by 7%, the two sideswill agree to an increase in the money wage ofA 2%B 5 %C 7 %D 12%Inflation targeting consists of the Federal Reserve using monetary policy to reduce the annual inflation rate by a set amount cach year until the rate of inflation is negative using monetary policy to hold the price of a fixed basket of commodities (wheat, gold) to a 5-6 percent annual rate regularly stating an explicit goal for the rate of inflation over some future period, such as 2 percent inflation over the next two years identifying the sources of inflation and recommending structural changes in the economy that would relieve upward price pressuresIn a particular economy the real money demand function is Real Interest Rate, r (%) 0.451 M 0.40- 3,000 + 0.10Y-9,000i. P 0.35- Assume that M = 7,000 and P = 2. Initially, expected inflation, zewas 0.02. Initially, when Y= 8000, the real interest rate of 0.013 cleared the asset market and when Y = 9000, the real interest rate of 0.024 cleared the asset market. The initial LM curve is drawn as 0.30- 0.25 0.20- LM,. 0.15- Now suppose that the expected inflation rate increases to 0.03. Using the new expected inflation rate, calculate the real interest rate that clears the asset market when Y = 8000. (Enter your answer in decimals, rounded to three decimals.) D. This is point C. 0.10- LM, 0.05- 0.00+ 7 8 10 Output, Y (thousands)
- 3b. Suppose a country has a money demand function (M/P)d kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is I d = 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are: expected inflation = 0.05, G = 200, yC= 1,600+0.6(Y-7) - 2,000r P=2,500-1,000r G=2,000 NX= 50 T= 2,000 The Bank of Lotusland, the central bank, has announced that it will set the real interest rate according to the policy reaction function found in the table below. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 a. For each of the rates of inflation given below, find autonomous expenditure and short-run equilibrium output in Lotusland. Instructions: Enter your responses rounded to whole numbers. Inflation rate, n Real interest rate, r 0.040 0.045 0.050 0.055 0.060 0.00 0.01 0.02 0.03 0.04 Autonomous expenditure Equilibrium output Using the data above, graph the AD curve Instructions: in the graph below, use the line tool AD' to draw the aggregate demand line for levels of inflation 4 percent and 0 percent. Draw only the two endpoints.
- 2) The nominal interest rate is equal to the real interest rate if A) Expected inflation is greater than the nominal interest rate. B) Expected inflation is less than the real interest rate. C) Expected inflation is positive. D) Expected inflation equals to zero. E) none of the aboveAt the end of September, a barrel of light crude oil sold for almost $70 compared to a price near $30 a barrel in January 9f 2004. To answer the following questions,assume bind traders expect inflation to rise from 3% in 2005 to 5% in both 2006 and 2007. Also traders expect the American economy to enter a recession in 2007. Assume the prior to the recent run up oil prices, bond traders had expected inflation to remain stable in 2006 and 2007 at 3%. Using a model of supply and demand for one year T-Bills, illustrate and explain the impact of a recession ( a business cycle contraction) if bond traders expect that this recession will occur in 2007,what do you expect to happen to yields on one year T- Bills in 2007?23) How might big companies ,such as Walmart, avoid contributing to inflation when raising employees wages ?