Problem 1. The Cagan Model. The liquidity function is given by L(Y, i) = Y - 40,000i. Output Y is constant and equal to 3200. The nominal interest rate is i. The real interest rate is 4%. (A) Derive the velocity of money V. (B) The central bank keeps the nominal money supply M constant at 1600, and the public expect the money supply to be constant. Find the price level P. [Hint: P = 1.] (C) The central bank suddenly conducts an open market operation: it purchases government bonds. This intervention changes the money supply by 2%. Will M go up or down? Explain and find the new price level.
Problem 1. The Cagan Model. The liquidity function is given by L(Y, i) = Y - 40,000i. Output Y is constant and equal to 3200. The nominal interest rate is i. The real interest rate is 4%. (A) Derive the velocity of money V. (B) The central bank keeps the nominal money supply M constant at 1600, and the public expect the money supply to be constant. Find the price level P. [Hint: P = 1.] (C) The central bank suddenly conducts an open market operation: it purchases government bonds. This intervention changes the money supply by 2%. Will M go up or down? Explain and find the new price level.
Chapter1: Making Economics Decisions
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![Problem 1. The Cagan Model. The liquidity function is given by L(Y, i) = Y – 40,000i. Output Y
is constant and equal to 3200. The nominal interest rate is i. The real interest rate is 4%.
-
(A) Derive the velocity of money V.
(B) The central bank keeps the nominal money supply M constant at 1600, and the public expect the
money supply to be constant. Find the price level P. [Hint: P = 1.]
(C) The central bank suddenly conducts an open market operation: it purchases government bonds. This
intervention changes the money supply by 2%. Will M go up or down? Explain and find the new
price level.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff9aa6375-799e-4784-bd58-ee9cbfd91b46%2Fee8bfee4-8ea1-4cf4-841c-cbfe2a7713de%2F12evioc_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 1. The Cagan Model. The liquidity function is given by L(Y, i) = Y – 40,000i. Output Y
is constant and equal to 3200. The nominal interest rate is i. The real interest rate is 4%.
-
(A) Derive the velocity of money V.
(B) The central bank keeps the nominal money supply M constant at 1600, and the public expect the
money supply to be constant. Find the price level P. [Hint: P = 1.]
(C) The central bank suddenly conducts an open market operation: it purchases government bonds. This
intervention changes the money supply by 2%. Will M go up or down? Explain and find the new
price level.
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