SECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (I) functions are given by C = 100+ 0.5 · (Y – Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is M Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is n° = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublic: investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular:

SECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (I) functions are given by C = 100+ 0.5 · (Y – Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is M Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is n° = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublic: investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular:

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter13: Monetary Policy: Conventional And Unconventional

Section: Chapter Questions

Problem 8TY

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"that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money" do you agree or disagree with this statement? provide two reasons why?
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