What will the inflation rate be in the period of the cuts

Reference no: EM13698852

You need both equations and clearly labeled graphs (separate graphs for each question) to answer the following questions. Assume that b=1/2 and that initially the real interest rate is equal to the marginal product of capital at 3%. As well, assume that v=2 and that the inflation rate last period was 2%. Assume the natural rate of unemployment is 5.5%.

a. The Sequester is probably a bad idea. Use the IS-MP model we developed in class to explain what should happen to the economy if the government cuts spending by 1 percentage point of potential GDP.

b. How much can we expect this to increase the unemployment rate? (no need for a graph)

c. How much will this change inflation? What will the inflation rate be in the period of the cuts?

d. What was the nominal interest rate last period (before the cuts) if the real rate was equal to the marginal product of capital.

e. What happens to the real rate of interest this period (after the cuts) if the Federal Reserve does nothing to change the nominal rate. What will this do to the economy? Remember that the government has cut spending in question 2a.

f. What does the Federal Reserve have to change the nominal interest rate to in order to close the output gap?

Reference no: EM13698852

Questions Cloud

Variable cost arising from the physical inputs marcella : Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella required to operate her business.

How households will respond to changes in prices or incomes : Economic theory offers ______ about the full range of possible events and responses, which can prevent _______ about how households will respond to changes in prices or incomes.

Elasticity of demand for any particular brand to be high : There are many brands of laundry detergent, all equally effective. Would you expect the elasticity of demand for any particular brand to be high or low? Explain.

Domestic investment and net capital outflow : Assume only two countries, China and the US. If China decides to stimulate growth through a policy of running a large export trade surplus, does China’s national saving increase? Show the relationship between China’s national savings, domestic invest..

What will the inflation rate be in the period of the cuts : You need both equations and clearly labeled graphs (separate graphs for each question) to answer the following questions. Assume that b=1/2 and that initially the real interest rate is equal to the marginal product of capital at 3%. As well, assume t..

Consumer and business confidence and the economy : How can an event such as the terrorist attacks of September 2001 affect consumer and business confidence and the economy?

Efficiency of monopolistic and perfectly competitive markets : Compare the efficiency of monopolistic and perfectly competitive markets. Discuss the economic factors that lead to the development of monopolies. Examples of monopolies include electric utilities, railroads, airlines, cable television, and sports le..

Normalize the range such that the transformed range : Normalize the range such that the transformed range has a mean of 0 and a standard deviation of 1 - Partition them into three bins by each of the given methods.

What does the term polymorphism mean : What does the term polymorphism mean? Provide an example.

User Account

All Pages