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Chapter 22: Q.11 (page 582)

If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output?

Short Answer

Expert verified

If the new exports don't respond or change with the change in real interest rates, the monetary policy are going to be effective. This reason lays the very fact that monetary policy leads to change in finances with effect from interest rates.

Step by step solution

01

Concept Introduction 

Monetary Policy is formulated by financial organisation to take care of the interest rates and monetary resource within the economy. financial institution operates monetary policy so on attain appropriate rate, consumption level, growth and liquidity rate within the economy.

02

Explanation of Solution 

Real Interest Rates are the rates which each investor expects to attain after granting for inflation. Net export is that the value of total exports done by a rustic minus its imports.

Net Export = Exports - Imports

If the new exports don't respond or change with the change in real interest rates, the monetary policy are going to be effective. This reason lays the very fact that monetary policy leads to change in finances with effect from interest rates.

Rather, economic policy are going to be affected if net exports don't change with change in interest rates.

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Most popular questions from this chapter

Consider an economy described by the following:

C=\(3.25trillionI=\)1.3trillionG=\(3.5trillionT=\)3.0trillionNX=-$1.0trillionf=1mpc=0.75d=0.3x=0.1l=1r=1

a. Derive expressions for the MP curve and the AD curve.

b. Assume that π=1. Calculate the real interest rate, the equilibrium level of output, consumption, planned investment, and net exports.

c. Suppose the Fed increases r to r = 2. Calculate the real interest rate, the equilibrium level of output, consumption, planned investment, and net exports at this new level of r.

d. Considering that output, consumption, planned investment, and net exports all decreased in part (c), why might the Fed choose to increase r?

How does an autonomous tightening or easing of monetary policy by the Fed affect the aggregate demand curve?

Suppose that a new Fed chair is appointed and that his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment. Inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all?

What would be the effect of an increase in U.S. net exports on the aggregate demand curve? Would an increase in net exports affect the monetary policy curve? Explain.

Why does the MP curve necessarily have an upward slope?
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