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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.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Thank you for answering Exercise 5. Please answer Exercise 6, thank you.
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. t-1 Exercise 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E, n, = E,",, where E,n denotes the expected value in periodt of inflation in period t + 1. Find the inflation rate in period 1.
Transcribed Image Text: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. t-1 Exercise 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E, n, = E,",, where E,n denotes the expected value in periodt of inflation in period t + 1. Find the inflation rate in period 1.
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