Consider an economy in which the LM and IS functions are given below. Suppose the economy is purely classical so that yt=ý (you can see in picture) Then these equations can be condensed to LM mt - pt = y + c2Rt + εt, c2 < 0 IS Rt = r + Et(pt+1 - pt) + nt For simplicity, delete εt. Then assume that the monatery authority creates money according to MP mt = u0 + u1t + et Assume that et and nt are white noise and find the solution for pt and then for Rt.
Consider an economy in which the LM and IS functions are given below. Suppose the economy is purely classical so that yt=ý (you can see in picture) Then these equations can be condensed to LM mt - pt = y + c2Rt + εt, c2 < 0 IS Rt = r + Et(pt+1 - pt) + nt For simplicity, delete εt. Then assume that the monatery authority creates money according to MP mt = u0 + u1t + et Assume that et and nt are white noise and find the solution for pt and then for Rt.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider an economy in which the LM and IS functions are given below. Suppose the economy is purely classical so that yt=ý (you can see in picture)
Then these equations can be condensed to
LM mt - pt = y + c2Rt + εt, c2 < 0
IS Rt = r + Et(pt+1 - pt) + nt
For simplicity, delete εt. Then assume that the monatery authority creates money according to
MP mt = u0 + u1t + et
Assume that et and nt are white noise and find the solution for pt and then for Rt.
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