Suppose you observe the time series of output y and real money supply M/ P reported in the Figure below. Nominal money supply M is under full control of the Central Bank. Output y Real Money Supply M³1P Time t Time t 1 3 4 1 4 5 Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t= 1, and interpret time t= 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements: (B) Can the shock be a permanent change, positive or negative, in nominal

Suppose you observe the time series of output y and real money supply M/ P reported in the Figure below. Nominal money supply M is under full control of the Central Bank. Output y Real Money Supply M³1P Time t Time t 1 3 4 1 4 5 Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t= 1, and interpret time t= 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements: (B) Can the shock be a permanent change, positive or negative, in nominal

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 3CQQ

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Now, consider an economy in which the demand for money is of the formY(1 + it)for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The REAL INTEREST RATE, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the 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. Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1,M1 / P1, and, E1π2. B. Find the inflation rate, nominal interest rate, real money balance in period 2,and expected inflation in period 3, given the information available in period 2. (π2, i2, M2 / P2 and E2π3.) C. Find the inflation rate, nominal interest rate, and real money…
Now, consider an economy in which the demand for money is of the formY / (1 + it) for t = 0, 1, 2, · · · , where output is 150 and it denotes the nominal interest rate inperiod t. The real interest rate, denoted r, is constant and equal to 4%. In period0 and 1, the money supply is 100 and people expect that money supply wouldbe 100 forever. People have rational expectations. In period 2, the central banksurprises people and sets the 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 . Find the inflation rate, nominal interest rate, real money balance in period 1,and expected inflation in period 2, given the information available in period1, π1, i1, M1 / P1 and, E1π2. B . Find the inflation rate, nominal interest rate, real money balance in period 2, and expected inflation in period 3, given the information available in period 2, π2, i2, M2 / P2 and E2π3. C . Compare E1π2 and π2.
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