Consider an economy in which the demand for money is of the formMt =(1/v) PtYfor t = 0, 1, 2, · · · , where output is 150, the money velocity is 1.5. The money supplyis 100 for t = 0, 1. In period 2, the central bank surprises people and announcethat money supply will grow at 2 percent forever, that is, M0 = 100, M1 = 100,M2 = (1.02)M1, M3 = (1.02)M2, and so on a. What is the inflation rate in period 1, π1? What is real money balance in period 1, M1 / P1? What is the expected inflation in period 2, given the informationavailable in period 1, E1π2? b. What is the inflation rate in period 2, π2? What is real money balance inperiod 2, M2/P2? What is expected inflation in period 3, given the informationavailable in period 2, E2π3? c. 4. Compare E1π2 and π2.
Consider an economy in which the demand for money is of the form
Mt =(1/v) PtY
for t = 0, 1, 2, · · · , where output is 150, the money velocity is 1.5. The money supply
is 100 for t = 0, 1. In period 2, the central bank surprises people and announce
that money supply will grow at 2 percent forever, that is, M0 = 100, M1 = 100,
M2 = (1.02)M1, M3 = (1.02)M2, and so on
a. What is the inflation rate in period 1, π1? What is real money balance in period 1, M1 / P1?
What is the expected inflation in period 2, given the information
available in period 1, E1π2?
b. What is the inflation rate in period 2, π2? What is real money balance in
period 2, M2/P2?
What is expected inflation in period 3, given the information
available in period 2, E2π3?
c. 4. Compare E1π2 and π2.
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