Analysis Of Proposition Of Rational Expectations, Developed By Lucas, Sargent And Wallace

Since the Central Bank has the exclusive right to issue money in the economy, it can have extensive influence on the determination of interest rate in financial markets and in the economy as a whole, by adjusting the interest rate on short-term loans to financial institutions. Central Bank interest rates on these loans therefore have the most immediate impact on other short-term interest rates in the money market. By influencing interest rates, monetary policy then has an effect on the savings and expenditure decisions of individuals and corporate.

(1) Explain what the Stable-Monetary-Unit Assumption is (10 points) and (2) provide an example of its application. (10 points)

C/D = 0.1; T/D = 2; ER/D = 0.2, [pic], [pic], MB = 1000. Compute the money multiplier, the money supply, the level of currency and checkable deposits, the level of time deposits and excess reserves, and the level of total reserves and required reserves. Use the model of money supply determination discussed in class. Show your work.

“Provide Summary Level Paper (limit 10 pages) “Purpose and Practice of Inflation Forecasting by Nation” – for insertion after the “Measures of Inflation”

4) Briefly describe money’s function from the view of economists and write down the definition of M1 and M2.

In this paper, we will be using the log-log model. The log-log model used for the demand for wealth (attuned for inflation). We will be using the M1, as a display, for demand on wealth and interest rate as the illuminating variable affecting the demand for wealth. Using the regression, we will study the hypothesis. For this paper, the hypothesis used will talk about the connection between money and the interest rate. The null hypothesis, in this case, will be the interest affecting the demand for money in the economy. The data that we will be reviewing is from October 2008 to October 2011, 3 years worth of data. This connection will give us the basic understanding of the performance of the monetary policy in US economy after the crisis.

The internet has allowed the money market to operate 24 hours a day. It has been noted however that exchange rate volatility has increased,[v] which makes it more difficult for the government to set monetary policy.

By how much will Y increase in short-run equilibrium? What is the multiplier for money supply (the change in Y divided by the change in Ms)?||

money supply by increasing or decreasing the reserve ratio and discount rates, and buying or

1.      What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.

Monetarist school of thought states that Money Supply is neutral and cannot have any impact on the real factors in an economy like output levels and so on. Price level and money supply considered independent from one another. Supply of money matters for the macro economy, Friedman believes, that gold standard will intrinsic the limitations to money supply, monetary policy controls the supply of money which often targeting inflation rate or interest rate and manage price stability in the currency. Monetary policy referred to as expansionary and contractionary policy, when supply rise expansionary policy helps to combat unemployment by rising supply of money, while contractionary policy works in recession intended to slow inflation. Increase

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

2. The money-measurement assumption which assumes that purchasing power of rupee is stable is a major limitation of the cost concept.

These conclusions correspond to the claim of the quantitative theory that money is the primary determinant of nominal income. If thus the rate of money circulation does not change (here the rate need not necessarily by a constant ), then money exclusively determines changes in the price level and nominal income, so monetary policy can, through regulating the development of the individual money aggregates (M1, M2, etc.), influence macroeconomic variables and predict their development.