B. Consider the following model where the monetary policy will be the only policy variableaffecting demand for output. For expositional purposes the income velocity of money isheld constant. With these assumptions the aggregate demand for output can be writtenin logs as:mt + v = Pt+ YtThe above equation is the equation of exchange in logs (equation that addresses therelationship between money and price level, and between money and nominal GDP. Theequation tells us that total spending (M x V) is equal to total sales revenue (P x Y)).To complete the model we need to add the aggregate supply equation and a moneysupply rule.yt = y'+ a(pt - Et-1pt1)(2)mt = Byt-1+Et(3)Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Isthere any scope in this model for the policy authorities to influence the output throughsystematic stabilisation policy? Explain your answer.

The probability that an event at the firm level will cause serious instability or the collapse of a…

Answered: there any scope in this model for the…

there any scope in this model for the policy authorities to influence the output through systematic stabilisation policy? Explain your answer.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 4SQP

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Question

B. Consider the following model where the monetary policy will be the only policy variable
affecting demand for output. For expositional purposes the income velocity of money is
held constant. With these assumptions the aggregate demand for output can be written
in logs as:
mt + v = Pt+ Yt
The above equation is the equation of exchange in logs (equation that addresses the
relationship between money and price level, and between money and nominal GDP. The
equation tells us that total spending (M x V) is equal to total sales revenue (P x Y)).
To complete the model we need to add the aggregate supply equation and a money
supply rule.
yt = y'+ a(pt - Et-1pt1)
(2)
mt = Byt-1+Et
(3)
Given that agents form expectations rationally, find a solution for (i) yt and (ii) pt. Is
there any scope in this model for the policy authorities to influence the output through
systematic stabilisation policy? Explain your answer.

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