(The Cagan Model and Output Growth). Suppose that the demand for money is given by Ma Yt Pt 1 + it V = where M is the nominal demand for money, P, is the price level, Y, is real output, and it is the nominal interest rate, in period t. Suppose that people have rational expectations. Suppose further that Y grows at 3 percent, that Yo 1, that the nominal money supply, denoted Mt, grows at 5 percent, that Mo= 100, and that the real interest rate, denoted r, is constant and equal to 4 percent. = Mt 1. Guess the equilibrium growth rate of the real money supply, M, and explain why you think your Pt Pt guess makes sense. Let It = - 1 be the inflation rate in period t. Given your guess, what is Pt+1 the inflation rate in periods 1, 2,.... 2. Given your guess, use the Fisher equation to calculate the nominal interest rate, it, in periods t = 0, 1, 2, ... Check whether your guess is correct, that is, check whether, given your guess, the Mt real demand for money, grows at the same rate as the real money supply, Pt Yt 1+it' 3. Given your guess, what is the price level in period 0, Po?

(The Cagan Model and Output Growth). Suppose that the demand for money is given by Ma Yt Pt 1 + it V = where M is the nominal demand for money, P, is the price level, Y, is real output, and it is the nominal interest rate, in period t. Suppose that people have rational expectations. Suppose further that Y grows at 3 percent, that Yo 1, that the nominal money supply, denoted Mt, grows at 5 percent, that Mo= 100, and that the real interest rate, denoted r, is constant and equal to 4 percent. = Mt 1. Guess the equilibrium growth rate of the real money supply, M, and explain why you think your Pt Pt guess makes sense. Let It = - 1 be the inflation rate in period t. Given your guess, what is Pt+1 the inflation rate in periods 1, 2,.... 2. Given your guess, use the Fisher equation to calculate the nominal interest rate, it, in periods t = 0, 1, 2, ... Check whether your guess is correct, that is, check whether, given your guess, the Mt real demand for money, grows at the same rate as the real money supply, Pt Yt 1+it' 3. Given your guess, what is the price level in period 0, Po?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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