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    Economics Finals Preparation Material

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    - The document discusses topics related to macroeconomics finals including fiscal and monetary policy, interest rates, inflation, and economic theories. - It provides examples of calculating nominal interest rates, real rates of return, and the effects of inflation and tax rates. - Questions are asked about the Fisher effect, how the Federal Reserve might respond to changes in velocity under a monetary growth or nominal GDP rule, and predictions of inflation and GDP based on economic models.

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    Economics Finals Preparation Material

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    barbora260504
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    - The document discusses topics related to macroeconomics finals including fiscal and monetary policy, interest rates, inflation, and economic theories. - It provides examples of calculating nominal interest rates, real rates of return, and the effects of inflation and tax rates. - Questions are asked about the Fisher effect, how the Federal Reserve might respond to changes in velocity under a monetary growth or nominal GDP rule, and predictions of inflation and GDP based on economic models.

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    Economics finals preparation material

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    - The document discusses topics related to macroeconomics finals including fiscal and monetary policy, interest rates, inflation, and economic theories. - It provides examples of calculating nominal interest rates, real rates of return, and the effects of inflation and tax rates. - Questions are asked about the Fisher effect, how the Federal Reserve might respond to changes in velocity under a monetary growth or nominal GDP rule, and predictions of inflation and GDP based on economic models.

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    19 views3 pages

    Economics Finals Preparation Material

    Uploaded by

    barbora260504
    - The document discusses topics related to macroeconomics finals including fiscal and monetary policy, interest rates, inflation, and economic theories. - It provides examples of calculating nominal interest rates, real rates of return, and the effects of inflation and tax rates. - Questions are asked about the Fisher effect, how the Federal Reserve might respond to changes in velocity under a monetary growth or nominal GDP rule, and predictions of inflation and GDP based on economic models.

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    Economics finals

    /makroekonomický grafy, měnová a fiskální politika


    ⁃ Byl F. A. Hayek velkým zastáncem vládních zásahů v dobách hospodářských krizí
    NE
    ⁃ U následujícího scénáře určete, o jaký typ makroekonomické politiky se jedná
    “Vláda zvyšuje daně pro podniky”.
    FISCAL POLICY

    Fiscal policy

    Monatory policy and the Federal reserve


    ⁃ 1.The real interest rate is equal to:
    The nominal interest rate minus the inflation rate.
    ⁃ 2.How does inflation redistribute wealth when the rate is higher than expected?
    Unexpected inflation reduces the real return on a loan, so wealth moves from the lender
    to the borrower.
    ⁃ 3. The Fisher effect states that:
    Nominal interest rates will rise with expected inflation rates.
    ⁃ 4. If the inflation rate is expected to be 7% over the next year, and Bank of
    Bigbucks aims to secure a real return on loans of 6%, what will the bank set interest rates
    at for borrowers?
    13%
    ⁃ 5. Uncertainty about future inflation rates and the real rate of return on loans is
    problematic for the economy overall because:
    As long-term lending become more costly and less common, the economy invests less.

    ⁃ 6.Calculate the nominal rate of return after taxes if the nominal interest rate is 6%.
    4%
    ⁃ 7. Now calculate the real rate of return after taxes, which takes inflation into
    account. In this scenario, inflation is 3%.
    1%
    ⁃ 8. Calculate the nominal rate of return after taxes if the nominal interest rate is
    12%.
    8%
    ⁃ 9. Now calculate the real rate of return after taxes, which takes inflation into
    account. In this scenario, inflation is 9%.
    -1%

    ——————————
    As promised, we left you on your own to calculate the final scenario. For the following
    two questions, use the table below.

    ⁃ 1. What is the nominal rate of return after taxes if the nominal interest rate on a
    savings account is 900% (!)? Assume the government tax rate is ⅓.
    600%
    ⁃ 2. What is the real rate of return after taxes, given that inflation is 897% per year?
    -297%
    • The above examples assumed that inflation, though very high, was expected. Now
    let’s see what happens when inflation is high and unexpected. For the next two questions,
    assume the nominal interest rate is 6% and inflation is unexpectedly 15% that year.
    Assume the government tax rate is ⅓.
    ⁃ 3. What is the nominal rate of return after taxes?
    4%
    ⁃ 4. What is the real rate of return after taxes?
    -11%

    ————————
    ⁃ 1. Let’s suppose there is a massive, negative velocity shock to the economy. If the
    Federal Reserve is following an annual Monetary Growth Rule of 3%, what will happen
    to inflation and real GDP in the short run?
    Inflation will fall and real GDP will fall.
    ⁃ 2. What will happen to inflation and real GDP in the long run?
    Inflation will fall and real GDP will stay constant.
    ⁃ 3. Now suppose the Fed is trying to follow a Nominal GDP Rule of 3%. If v,
    velocity, suddenly fell by 4%, what action, if any, should the Fed take?
    Increase the Money Supply by 4%.
    • For the next four questions, let’s look at the Money Supply (M2) and velocity
    ‘before’ and ‘after’ the banking crisis of the Great Depression, as seen in the table below.
    ⁃ 4. What was the level of nominal GDP in 1932?
    $76.2 billion.
    ⁃ 5. What was the level of nominal GDP in 1934?
    $78.1 billion.
    ⁃ 6. What was the approximate growth of nominal GDP between these two years?
    (Hint: this question is difficult!)
    +3.1%
    ⁃ 7. If velocity growth would have been zero during this period, but money growth
    stayed the same, what would have happened to nominal GDP?
    -6.2%.

    ————
    Keynesian business cycle theory
    ⁃ According to Keynesian business cycle theory, if consumption and investment fall,
    what will happen to government spending?
    It will fall.

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