Consider the following aggregate demand and supply relations and the monetary policy rule. yt= β0 + β1(mt -pt) + ωt (AD) yt= yn + α (pt -Et-1pt) + νt (AS) mt= μ0 + μ1mt-1 + et (MP) The random term for AD has the moving average form ωt = ξt+ρξt-1, where ξt, et, and νt are white noise terms. Derive a solution for pt and yt.
Consider the following aggregate demand and supply relations and the monetary policy rule. yt= β0 + β1(mt -pt) + ωt (AD) yt= yn + α (pt -Et-1pt) + νt (AS) mt= μ0 + μ1mt-1 + et (MP) The random term for AD has the moving average form ωt = ξt+ρξt-1, where ξt, et, and νt are white noise terms. Derive a solution for pt and yt.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the following aggregate demand and supply relations and the
yt= β0 + β1(mt -pt) + ωt (AD)
yt= yn + α (pt -Et-1pt) + νt (AS)
mt= μ0 + μ1mt-1 + et (MP)
The random term for AD has the moving average form
ωt = ξt+ρξt-1,
where ξt, et, and νt are white noise terms.
Derive a solution for pt and yt. (To solve this question correctly, It is important to use bennett mccallum's rational expectations solution procedure. Name of the book is monatery economics, bennett mccallum.)
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