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Policymaking is much easier when the state of the economy is easily observable than when there is uncertainty about how the economy is doing, as this problem illustrates. Suppose that the economy is either in an expansion or a recession. Suppose that in an expansion, monetary policy ideally sets the interest rate on federal funds (loans between banks) at 6 percent, whereas if the economy is in a recession, the federal funds rate is ideally set at 2 percent. If monetary policymakers know the state of the economy when they set policy, then policymaking is easy-set the fed funds rate at 6 percent when in expansion and at 2 percent when in recession. Suppose, however, that policymakers cannot easily observe the current state of the economy. They know only what the state of the economy was three months ago. Suppose that if the economy was in an expansion three months ago, there is a 90 percent chance the economy is still in an expansion (and thus a 10 percent chance that it is now in a recession). And suppose that if the economy was in a recession three months ago, there is a 75 percent chance that it is still in a recession (and a 25 percent chance that it is now in an expansion). Given these probabilities, what would you guess is the right setting for the federal funds rate if the economy was in a recession three months ago? What is the right setting for the federal funds rate if the economy was in an expansion three months ago? (Note: To answer these questions, you must make an assumption about the ideal federal funds rate when you do not know what the state of the economy is-you may make any reasonable assumption you want, but you must justify it.)
The currency in Great Britain is pound and the price of a particular British car is 12,000. suppose the exchange rate is 0.67 per dollar.
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The cost of other variable inputs is $2,000 per day. You are told that the firm's fixed cost is high enough so that the firm's total costs exceed its total revenue.
The Wall Street Journal discusses a trend among some large US Corporation to base the compensation of outside members of their boards of directors partly on the performance of the corporation.
You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation. Help the management of the firm as to whether or not it should continue to operate at a loss?
Recently, Pfizer and Warner-Lambert agreed to a ninety billion dollar merger, thus creating one of the world's biggest pharmaceutical firms. Pharmaceutical firms tend to expend a greater percentage (%) of sales on R&D activities than other industries..
Which of the following is not one of the explicit functions of the Federal Reserve granted by Congress.
Consider industries that demonstrate monopoly, monopolistic competition, oligopoly, and perfect competition. What is the goal of creating a brand name for each of these market structures What does the brand name do to the demand curve for the prod..
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the government provides national dental benefits for all U.S. citizens that cover 100% of the cost of all dental services. There are two effects of this policy. First, there will be an increase in the number of consumers of dental services. Second..
Assume you're in charge of the toll bridge that essentially cost free. The demand for bridge crossings Q is given by P = 60 - 2Q. Draw a demand curve for bridge crossings
1. Explain the difference between general-equilibrium models and partial-equilibrium models. How are the numbers of endogenous and exogenous variables related to whether a model is a partial-equilibrium or general-equilibrium model?
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