Exercise 5. Consider an economy in which the demand for money is of the form Y /(1 +i,) for t = 0, 1, 2, .. ., where Y denotes a constant level of output and i, denotes the nominal interest rate in period t. The real interest rate, denoted r, is constant and equal to 4%. In period 0, the nominal interest rate is 15%, and the money supply is 100. People have rational expectations. In period 1, the central bank surprises people and sets the money supply to 104 and announces that starting in period 2 the money supply will grow at 2 percent forever, that is, M¿/M-1 = 1.02 for t = 2, 3,.. . Find the inflation rate in period 1. Compare it to E,1. %3D Exercise 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E,n2 = E,n1, where E,n+1 denotes the expected value in periodt of inflation in period t+ 1. Find the inflation rate in period 1.

Exercise 5. Consider an economy in which the demand for money is of the form Y /(1 +i,) for t = 0, 1, 2, .. ., where Y denotes a constant level of output and i, denotes the nominal interest rate in period t. The real interest rate, denoted r, is constant and equal to 4%. In period 0, the nominal interest rate is 15%, and the money supply is 100. People have rational expectations. In period 1, the central bank surprises people and sets the money supply to 104 and announces that starting in period 2 the money supply will grow at 2 percent forever, that is, M¿/M-1 = 1.02 for t = 2, 3,.. . Find the inflation rate in period 1. Compare it to E,1. %3D Exercise 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E,n2 = E,n1, where E,n+1 denotes the expected value in periodt of inflation in period t+ 1. Find the inflation rate in period 1.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter16: Monetary Policy

Section: Chapter Questions

Problem 1SQP

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