Chapter 15 Monetary Policy: Pre-Class & In-Class Activities Packet Name/I.D. Number: Part 4. Economic Equations and Graphs Section: Date: 1. Manuel bought a bond last year for $10,000 that promises to pay him $900 a year. This year, he can buy a bond for $10,000 that promises to pay $1,000 a year. If Manuel wants to sell his old bond, what is its price likely to be? 2. The annual average percentage change in Real GDP is 2.3 percent, and the annual average percentage change in velocity is 1.1 percent. Using the monetary rule discussed in the text, what percentage change in the money supply will keep prices stable (on average)? 3. According to the Taylor rule, if inflation is 8 percent and the GDP gap is 3 percent, what is the recommendation for the federal funds rate target? 4. Which panel in the figure best describes the situation in each of parts (a) - (d)? (Write the letter of the graph in the box) [ ] A. Expansionary monetary policy that effectively removes the economy from a recessionary gap [ ] B. Expansionary monetary policy that is destabilizing [ ] C. Contractionary monetary policy that effectively removes the economy from an inflationary gap [ ] D. Monetary policy that is ineffective at changing Real GDP LRAS SRAS SRAS LRAS SRAS LRAS SRAS SRAS LRAS XXXX ON O 0 QIQN Q 0 ON (a) (b) (c) Q O QN (d) SRAS AD Q 5