Author Question: What happens to the output gap, the real interest rate, and net capital flows with the occurrence of ... (Read 69 times)

tiara099

  • Hero Member
  • *****
  • Posts: 588
What happens to the output gap, the real interest rate, and net capital flows with the occurrence of each of the following events? Assume that exchange rates are flexible.
 
  a. The Federal Reserve increases the money supply.
  b. U.S. net exports decrease due to a decrease in incomes in Canada.
  c. Consumers decide to save more and spend less.
  d. Expected profits from newly-built factories in the United States decrease.

Question 2

If the inflation rate target is 2, the current inflation rate is 3, and the output gap is 2, then according to the Taylor rule, the nominal federal funds rate should be ________ percent.
 
  A) 4.5
  B) 7
  C) 6.5
  D) 5.5
  E) none of the above



manuelcastillo

  • Sr. Member
  • ****
  • Posts: 304
Answer to Question 1

a. If the Federal Reserve increases the money supply, the MP curve shifts down, causing interest rates to fall. Output rises, and net capital outflows increase as the interest rate falls.
b. If U.S. net exports decrease due to a decrease in incomes in Canada, the IS curve shifts to the left. The NCF curve shifts to the left since net capital outflows decrease at every interest rate. Output falls, the interest rate remains unchanged, and net capital outflows decrease.
c. If consumers decide to save more and spend less, consumption falls and the IS curve shifts to the left. Output falls, the interest rate remains unchanged, and net capital flows do not change.
d. If expected profits from newly-built factories in the United States decrease, the IS curve shifts to the left due to the decrease in investment. Output falls, the interest rate remains unchanged, and net capital flows do not change.

Answer to Question 2

C



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Drug-induced pharmacodynamic effects manifested in older adults include drug-induced renal toxicity, which can be a major factor when these adults are experiencing other kidney problems.

Did you know?

Only one in 10 cancer deaths is caused by the primary tumor. The vast majority of cancer mortality is caused by cells breaking away from the main tumor and metastasizing to other parts of the body, such as the brain, bones, or liver.

Did you know?

Street names for barbiturates include reds, red devils, yellow jackets, blue heavens, Christmas trees, and rainbows. They are commonly referred to as downers.

Did you know?

In the United States, congenital cytomegalovirus causes one child to become disabled almost every hour. CMV is the leading preventable viral cause of development disability in newborns. These disabilities include hearing or vision loss, and cerebral palsy.

Did you know?

Individuals are never “cured” of addictions. Instead, they learn how to manage their disease to lead healthy, balanced lives.

For a complete list of videos, visit our video library