...Question 1 1. In the dynamic model, the demand for goods and services will ______ as the natural level of output increases and ______ as the real interest rate increases. Answer | A. | increase; increase | | B. | decrease; decrease | | C. | decrease; increase | | D. | increase; decrease | 1 points Question 2 1. In the dynamic model, changes in fiscal policy are captured in changes in the: Answer | A. | natural rate of interest. | | B. | random demand shock. | | C. | natural level of output. | | D. | expected rate of inflation. | 1 points Question 3 1. A higher real interest rate (r↑) reduces the demand for goods and services by: Answer | A. | decreasing the natural level of output. | | B. | shifting the dynamic aggregate supply curve. | | C. | reducing investment and consumption spending. | | D. | increasing inflation expectations. | 1 points Question 4 1. Which of the following would be represented by a positive value of the random demand shock (εt > 0)? Answer | A. | a decrease in government spending | | B. | an increase in the central bank's inflation target | | C. | an aggressive increase in oil prices by a cartel | | D. | an irrational wave of optimism among investors | 1 points Question 5 1. Which of the following would be represented by a negative value of the random demand shock (εt < 0)? Answer | A. | an irrational wave of optimism among investors | ...
Words: 964 - Pages: 4
...How to correct the Balance of Payment ? Solution to correct balance of payment disequilibrium lies in earning more foreign exchange through additional exports or reducing imports. Quantitative changes in exports and imports require policy changes. Such policy measures are in the form of monetary, fiscal and non-monetary measures. Monetary Measures for Correcting the BoP ↓ The monetary methods for correcting disequilibrium in the balance of payment are as follows :- 1. Deflation Deflation means falling prices. Deflation has been used as a measure to correct deficit disequilibrium. A country faces deficit when its imports exceeds exports. Deflation is brought through monetary measures like bank rate policy, open market operations, etc or through fiscal measures like higher taxation, reduction in public expenditure, etc. Deflation would make our items cheaper in foreign market resulting a rise in our exports. At the same time the demands for imports fall due to higher taxation and reduced income. This would built a favourable atmosphere in the balance of payment position. However Deflation can be successful when the exchange rate remains fixed. 2. Exchange Depreciation Exchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This device implies that a country has adopted a flexible exchange rate policy. Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India experiences an adverse...
Words: 5627 - Pages: 23
...Monetary Policy Design in a DSGE Model 1. A simple model 1.1 Households The utility function of a representative household is ∞ ⎛ ξ C1−σ L1+η ⎞ Et ∑ β s ⎜ t + s t + s − t + s ⎟ 1+η ⎠ s =0 ⎝ 1−σ (1) The dynamics of the demand shock is ζ t = ζ t −1 + eζ ,t , where ξt = eζ . The consumption is t θ −1 ⎡ 1 ⎤ θ −1 composed of lots of goods. It is composed in a CES function Ct = ⎢ ∫ Ct (i ) θ di ⎥ . The i =0 ⎣ ⎦ 1 1−θ 1−θ consumer price index is P = ⎡ ∫ P (i ) di ⎤ . Then the demand function of each good is t t ⎢ i =0 ⎥ ⎣ ⎦ 1 θ ⎡ P (i ) ⎤ Ct (i ) = ⎢ t ⎥ Ct ⎣ Pt ⎦ The budget constraint is −θ PCt + Bt = Wt Lt + Π t + Rt −1 Bt −1 t The first order condition for Ct , Lt , and Bt are Ct−σ = λt Pt Lη = λtWt t λt = Rt λt +1|t After some calculation, we have the Euler equation and labor supply equation ξt +1Ct−+σ / Pt +1 1 β Rt Et =1 −σ ξt Ct / Pt ξt Ct−σ Pt 1.2 Firms (2) = Lη t Wt (3) Assume there is a type of price stickiness in the economy, that each firm has a probability φ that cannot change its price, and fixed the level as the last time. And it has a probability 1 − φ that can re-optimal its price. The problem of a firm which can re-optimal its price in time t is 1 Et ∑ (βφ ) s Λ t + s [ Pt* (i )Yt (i ) − Wt Lt (i )] s =0 ∞ ⎡ Pt * ⎤ s.t.Yt + s (i ) = ⎢ ⎥ Ct and Yt (i ) = At Lt (i ) ⎣ Pt + s ⎦ The dynamics of the technology shock is at = ρ a at −1 + ea ,t , where at = ln( At ) . The first order condition is ...
Words: 1198 - Pages: 5
...Causes of Euro debt crisis 1. Profligacy of the European Government & Unsustainable Fiscal Policy Countries including Greece, Portugal, Ireland, Spain and Italy in Europe are now paying a heavy price on their profligate way of spending, as reflected by the Euro debt crisis starting from late 2009. Fiscal policy is the use of government expenses and taxation income so as to influence the economy, while the average fiscal deficits had grown from 0.6% in 2007 to 7% at the beginning of the debt crisis across the Europe (Économistes Atterrés, 2010). Therefore, more and more debts were being issued by the above governments so as to support their national expenses, leading to an excessive rise in government debt levels. For instance, the average government debts per GDP had raised from 66% to 84% in the same period (Krugman, 2012).Basically, government debt is the money owed by the central government to the debt holders. As a result, with a high level of the debt-to-GDP ratio may imply that the country is less likely to repay the debt holders but higher chance to default on its debt obligations. Greece, contributing about 3.3% of the annual GDP towards the European Union (Central Intelligence Agency, 2012), with a 165.3 % of debt-to GDP ratio in 2011, was responsible for the outbreak of the Euro debt crisis. Historically, Greece Government’s Debt to GDP ratio was already at a relatively high level across Europe (McAuley, 2011)(Graph 1). Following by the adoption of the...
Words: 1239 - Pages: 5
...Subject: ECO 550 Professor Name: DR. Yasmeen Student Name: Sayed Rohullah Week 3: Check your understanding 1. The forecasting staff for the Prizer Corporation has developed a model to predict sales of its air-cushioned ride snowmobiles. The model specifies that the S vary jointly with disposable personal income Y and the population between ages 15 and 40,Z, and inversely with the price of the snowmobiles P. Based on the past data, the best estimate of this relationship is S= K *YZ/P Where k has been estimated (with the pst data) to equal 100. If Y=$11,000, Z= $1,200, and P=$20,000 a. What value would you predict for S? Answer: The given function is S=K*YZ/P k=100 Y=$11,000 Z=$1,200 P=$20,000 S=100(11000*1200)/20000= $66,000 Problem 5 5. A firm experienced the demand shown in the following table. a. Fill in the table by preparing forecasts based on a five-year moving average, a three-year moving average, and exponential smoothing (with a w = 0.9 and a w = 0.3). The exponential smoothing forecasts may be begun by assuming Ŷt+1 = Yt. b. Using the forecasts from 2005 through 2009, compare the accuracy of each of the forecasting methods based on the RMSE criterion. c. Which forecast would you have used for 2010? Why? 5- year 3-Year Exponential Exponential Actual Moving Moving Smoothing Smoothing Year Demand Average Acverage (W= 0.9) 2000 800 xxxx xxxx xxxx Xxxx 2001 925 xxxx xxxx 687.5 762.5 2002 900 xxxx Xxxx 947.5 932.5 2003 1025...
Words: 1544 - Pages: 7
...because the dollar bill is actually a Federal Reserve note and that the Federal Reserve is not required to give gold or silver to for dollar bills. Federal Reserve currency is legal tender in the US, which means that the federal government requires that it be accepted in payment of debts and requires hat cash or checks denominated in dollar bills be use dint he payment of taxes. 4.1 The reason Congress set up a Federal Reserve System in 1913 is because those who deposited money into their accounts weren’t able to get their money back due to the fact that banks loan less than 100 percent of deposits and then loans the rest of the money to someone else. They set this up in order for the nation to have a safer, more flexible, and more stable monetary and financial system 4.2 In order for the Feds to control the money supply, the Feds use these policy tools to control the money supply (1) open the market operations (2) discount policy and (3) reserve requirements. The most important tool is checking account deposits. 4.3 The reason why an open market purchase of Treasury securities by the Federal Reserve increases bank reserves is because when the sellers of the treasury deposit the funds in their bank, the reserves of the banks rise. The reason why an open market sale of treasury securities by the Federal Reserve decreases bank reserves is because the FOMC directs the trading desk to sell treasury securities, causing the reserves of the bank to fall. 4.4 The shadow banking system...
Words: 663 - Pages: 3
...CERTIFIED ORGANISATION) (Rs. 40/- per annum) Committed to professional excellence Volume No. : 5 Issue No. : 6 January 2013 Mid-Quarter Monetary Policy Review - 18th Dec., 2012 Monetary and Liquidity Measures q The Cash Reserve Ratio (CRR) of scheduled banks remains unchanged at 4.25% of their Net Demand and Time Liabilities (NDTL). q Repo Rate under the Liquidity Adjustment The Facility (LAF) remains unchanged at 8%. qReverse Repo Rate under the LAF remains The unchanged at 7%. q The Marginal Standing Facility (MSF) and Bank Rate stands at 9%. Growth In Q2 of 2012-13, GDP growth at 5.3% was marginally lower than 5.5% recorded in Q1. On the domestic front, GDP growth is evolving along the baseline projection of 5.8% for 2012-13. Industrial activity rose sharply in October due to a low base and festive demand, propelling the growth of both consumer durables and non-durables into double digits. Significantly, capital goods production recorded a growth of 7.5% after 13 successive months of decline. Inflation Headline WPI inflation edged down to 7.2% in November due to softening of prices of vegetables, minerals and fuel. The new combined (rural and urban) CPI (Base : 2010 = 100) inflation increased in November, reflecting sustained food inflation pressures, particularly for vegetables, cereals, pulses, oils and fats. Monetary and Liquidity Conditions Money Supply (M3) growth remained below its indicative trajectory due to lower deposit growth; non-food credit growth rose...
Words: 5484 - Pages: 22
...10 years the EGP has undergone some fluctuation. As of December 10, 2002, the value of the EGP when compared to the US dollar was .21563. As of today when the EGP is compared to the US dollar the value is now .16385 (XE, 2012). However, the value was only up at .21563 for a brief period of time, it dropped sharply at the end of January from close to .22 by almost 3 points and continued to fall until the end of 2004 bottoming out at a low of .15852. Over the course of the next 4 years, the value of the EGP steadily grew until it topped out close to .19 in early August of 2008. Unfortunately, the value of the EGP has not seen a steady increase since (Figure 1). (XE, 2012) The reasons for the initial drop in the EGP can be attributed to monetary pressures overvaluing the EGP causing the Egyptian government to float the currency which also lead to an increase inflation of the EGP (Egypt Economy, 2012). A reason that there was another drop in value of the EGP in 2010 could have been attributed to the...
Words: 1905 - Pages: 8
...sentiments, status of the euro crisis, relative attractiveness of other market (such as Mexico, Africa, South East Asia) etc., However it would be ideal if the real was stable in the range of R$2 +/- 10% This would ensure stability in the economy and capital markets. A strong currency would encourage imports while a weak currency would discourage investments. Further a weak currency would also make the corporates in Brazil nervous as they will need to pay more reals for every $ of debt on their books. Would these be adverse developments for Brazil? Why? I think it is important to have stability in the currency before allowing it to float freely. Brasil is still an emerging economy and needs to have a scrupulous approach to its currency & monetary policy. It not only needs foreign capital for development but also needs to have a balanced current account. Further given the financial crisis Brasil went though in 80s due high inflation any sudden change could be detrimental. 2. Were the newly elected Brazilian President Dilma Rousseff and he...
Words: 760 - Pages: 4
...Fed’s Fisher Says Too-Big-to-Fail Banks Should Be Shrunk Federal Reserve Bank of Dallas President Richard Fisher said the government should break up the biggest U.S. banks rather than allow them to hold a “too-big- to-fail” advantage over smaller firms. The 12 largest financial institutions hold almost 70 percent of the assets in the nation’s banking system and profit from an unfair implicit guarantee that the government would bail them out, Fisher said today in a speech at the Conservative Political Action Conference in National Harbor, Maryland. The biggest banks enjoy a “significant” subsidy, enabling them “to grow larger and riskier,” he said. “These institutions operate under a privileged status,” Fisher said. “They represent not only a threat to financial stability, but to fair and open competition.” The biggest banks came under scrutiny yesterday at a Senate hearing on JPMorgan Chase & Co. (JPM), which hid trading losses, according to a report by the Senate’s Permanent Subcommittee on Investigations. The New York-based firm under Chief Executive Officer Jamie Dimon lost more than $6.2 billion last year in a credit derivatives bet by Bruno Iksil, known as the London Whale. Fisher said in a phone interview with Bloomberg News that his proposal “will not lead to the denial of credit for U.S. corporations.” The cost from big banks “far exceeds the benefits,” and the U.S. doesn’t need “to have the largest banks in the world to compete,” Fisher said after his speech. ...
Words: 759 - Pages: 4
...Evaluate the UK’s economic performance in recent decades from both an historical and international perspective. The UK has one of the largest and most globalised economies in the world. The UK was also the very first country to industrialise and historically for many decades was the leader of the global economy, however with the rises of China, United States, Germany and many others the UK has much less of a dominant role. Within recent decades the UK economy has faced many serious challenges, including three recessions in the early 80’s, early 90’s and late 00’s. Up until the onset of the recent financial crisis, output growth in the UK exceeded that in many other European countries. The UK’s economic performance remains one of the highest in Europe and it is still one of the most globalized countries in the world. Using 1980 as a base, in recent decades the economic output per head of population in Britain has risen giving significantly higher standards of living however the UK economy has been scarred by recession. The 80’s period saw great social, economic, and general change. Wealth and production progressively migrated to more newly industrialising economies. The early 1980s marked a severe global economic recession that affected much of the developed world. In the UK, the 1980s was a period of economic volatility. At the start of 1980, the biggest problem facing the UK was cost push inflation. In the late 1970s, UK inflation reached over 20%. This was caused by rising...
Words: 917 - Pages: 4
...Monetary Policy Monetary policy is to endorse price constancy, full employment, and economic growth. The United States has a devoted but detests banking system. The most rundown association is the nation’s central bank, the Federal Reserve. Purpose and Function of Money The purpose of function of money to devise an artificial value as medium used to evaluate a service or goods. Money performs as a stock up of value when someone obtains it either today or tomorrow, that person is still able to use it later. Money operates as a set of values when someone is using it to assess how much a good or service is worth. Central Bank The central bank administers the nation's monetary system by either increasing or decreasing the monetary supply, which can increase or decrease inflation, affect interest rates, and control the rate in which increase goods and services. The Federal Reserve can modify the interest rate on money it offers to banks. A higher interest rate composes money to be more expensive, and this discourages banks to lend out money. Dropping interest rates could have the opposite outcome. The Federal Reserve has the power to adjust the reserve requirements. If the Federal Reserve is inferior, the banks could boost their leverage and lend out more money. Recent Monetary Policy in the United States The recent report of the Monetary Policy Report to the Congress was on July 21, 2010. In the statement, it states that the Federal Reserve set aside their goals for...
Words: 719 - Pages: 3
...Debt Recovery Guru India -Non-performing assets of banks are set to cross the Rs one-lakh crore mark Written by Administrator Tuesday, 07 June 2011 07:08 Non-performing assets (NPAs) of banks are set to cross the Rs one-lakh crore mark in the current fiscal as the weakened asset quality of the banking sector is likely to spill over to the year 2011-12. After the 25 per cent rise in gross NPAs of bank to Rs 77,048 crore in 2009-10, bad loans of banks shot up by another 20.97 per cent in 2010-11. “The current fiscal will be slightly better for banks as most banks including SBI had made higher provisioning to clean up their balance sheets. The impact of this measure will be witnessed in the coming quarters. If they tighten up the recovery process, whatever they had provided will add to the profits,” said the former chief of a nationalised bank. “The earnings growth in the Indian banking sector in Q4 of FY11 grew by only 8 per cent y-o-y. This is attributable to the dismal performance by SBI, whose net profits for Q4 declined by 99 per cent to Rs 20.9 crore for the period. The reason for this decline in performance by SBI is being ascribed to decline in the Net interest margins; deterioration in the asset quality (and the consequent rise in NPAs); and the rise in the pension provisions for the employees,” said a note by Kotak Mutual Fund. “The RBI has initiated a slew of policy measures including aggressive rate hikes to rein in Inflation. The banking sector has responded by raising...
Words: 332 - Pages: 2
...A New House-Economy Checkpoint Chante Yokley XECO/212 December 11, 2011 John McGee A New House-Economy The FED impacts national fiscal policies through interest rates, which impacts the demand in the housing market (Mankiw, N. G., 2007, p. 657). The Department of Treasury introduced a refinancing program that allows consumers to refinance mortgages to take advantage of lower interest rates. The Fiscal Policy impacts prime lending rates, which are the determining factor in consumer borrowing. The higher lending rates mean a higher price paid for a new home. As rates increase, demand decreases causing a decline in the housing market and an overall lag in the economy. A contractionary fiscal policy would provide a short-term decrease in the money supply but would provide lower inflation in the long-run, reducing lending rates and increasing the aggregate demand in the housing market (Mankiw, N. G., 2007, p. 778, pp. 5). The strength of the economy would create an increase in marginal benefits, exceeding marginal costs by strengthening home owner’s equity. The government offers programs and tax incentives (deductions) that subsidize home ownership, making it affordable to be a homeowner. One in particular is the Mortgage Interest Deduction (MID), a popular tax break for middle to higher class citizens; research shows that the beneficiaries from the MID are in these societal classes (Stansel, Dean & Randazzo, Anthony, 2011, executive summary, p. 6). There...
Words: 330 - Pages: 2
...“Posen is right: a dovish approach to UK inflationary pressures is sensible” I believe that it is currently necessary to maintain interest rates at 0.5%. There are many reasons behind my belief that current interest rates should be maintained. [pic] Inflation rate in the UK at March 2011 was around 4%. We are currently in the middle of the most expansionary monetary policy in the history of the UK and this has only generated a rise in inflation to 2% above target. I recognise that inflation has been above target now since late 2009. In the Bank of England Inflation Report, it is predicted that inflation will be significantly above target for 2011 but should fall back quite sharply to around the 2% target in 2012. As we can see from the diagram the CPI-Y rate which excludes VAT and other indirect taxes is just over the target at around 2.5%. This is a rate which is more focused on core inflation and one which many believe monetary policy should be based on. As a number of the MPC members have said, it is somewhat tempting to give a temporary rise in interest rates to satisfy the public and the markets that the MPC are still interested in keeping inflation low. However, the main concern is the long term health of the economy and policy should be based on what we expect in the future. CPI is currently above average due to a combination of the low value of the pound, the high price of commodities and the increase in VAT in January 2011. However, the underlying...
Words: 1813 - Pages: 8
