Answered: Nominal income

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Nominal income targeting. Consider the simple macroeconomic model

where v is velocity, e, 0, and I] are disturbances with zero serial and cross correlation, and all other variables are standard. The information set at time t includes current and past values of G, 0, and 1].

(a) Derive output under a fixed money rule and a fixed nominal income rule.

(b) Under what conditions does a nominal income rule dominate a fixed money rule? What objective function should you use to answer that question?

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