Author Question: What happens to the output gap, the real interest rate, and net capital flows with the occurrence of ... (Read 10 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?

Nitroglycerin is used to alleviate various heart-related conditions, and it is also the chief component of dynamite (but mixed in a solid clay base to stabilize it).

Did you know?

Pregnant women usually experience a heightened sense of smell beginning late in the first trimester. Some experts call this the body's way of protecting a pregnant woman from foods that are unsafe for the fetus.

Did you know?

Chronic marijuana use can damage the white blood cells and reduce the immune system's ability to respond to disease by as much as 40%. Without a strong immune system, the body is vulnerable to all kinds of degenerative and infectious diseases.

Did you know?

A headache when you wake up in the morning is indicative of sinusitis. Other symptoms of sinusitis can include fever, weakness, tiredness, a cough that may be more severe at night, and a runny nose or nasal congestion.

Did you know?

In ancient Rome, many of the richer people in the population had lead-induced gout. The reason for this is unclear. Lead poisoning has also been linked to madness.

For a complete list of videos, visit our video library