Exercise 3. Consider a money demand function L(i, Y;) => Pt (i, Y) and M? Mt, where | Y; denotes output and i denotes the nominal interest rate. Suppose that i, = 3% and Y, = 100 for t = 0, 1, 2, . . .. Suppose further that the money supply, M, grows at 1% for t= 0, 1, 2, . . .. 1. What is the inflation rate in periods t= 1, 2, 3, .. .? Explain. 2. Assuming that agents have perfect foresight, what is the real interest rate for t= 1, 2, . ..?

Exercise 3. Consider a money demand function L(i, Y;) => Pt (i, Y) and M? Mt, where | Y; denotes output and i denotes the nominal interest rate. Suppose that i, = 3% and Y, = 100 for t = 0, 1, 2, . . .. Suppose further that the money supply, M, grows at 1% for t= 0, 1, 2, . . .. 1. What is the inflation rate in periods t= 1, 2, 3, .. .? Explain. 2. Assuming that agents have perfect foresight, what is the real interest rate for t= 1, 2, . ..?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 12SQ

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