Suppose that the short-term nominal interest rate--the one the central bank actu

Question

Suppose that the short-term nominal interest rate--the one the central bank actually controls-is 3%. But also suppose that the inflation rate is zero, that the term premium is 4%, and that the risk premium is 3% as well. What is the real interest rate relevant for the IS curve? Suppose that the IS equation of the economy is: Y = $1,000 - 3,000 times r. What is the equilibrium level of real GDP? Suppose that the central bank wants to use monetary policy to raise Y to $900 billion. Can it do so by open market operations that lower the short-term nominal interest rate? Explain why or why not. What other policy steps can you think of that the government and central bank could take to raise equilibrium real GDP to $900?

Explanation / Answer

A.3.50% is the interest rate.

B.$910 billion

C.these are operations where by bonds can be buy or sell.If we want to increase the money suppy in taht case fed have to buy back some of the central government bonds which was already issuerd in the past and now held by the public.If the equlilbrium GDP falls then the government ahs to increase the full employment upto $900.

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