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Category > Management Posted 15 Jan 2018 My Price 9.00

central bank’s ability

The central bank’s ability to control the real interest rate. Suppose the economy is described by two equations. The first is the IS equation, which for simplicity we assume takes the traditional form, Yt = −rt/θ. The second is the money-market equilibrium condition, which we can write as m − p =

 where m and p denote ln M and ln P .

(a) Suppose P = P and πe = 0. Find an expression for dr/dm. Does an increase in the money supply lower the real interest rate?

(b) Suppose prices respond partially to increases in money. Specifically, assume that dp/dm is exogenous, with 0 < dp/dm="">< 1.="" continue="" to="" assume="" πe="0." find="" an="" expression="" for="" dr/dm.="" does="" an="" increase="" in="" the="" money="" supply="" lower="" the="" real="" interest="" rate?="" does="" achieving="" a="" given="" change="" in="" r="" require="" a="" change="" in="" m="" smaller,="" larger,="" or="" the="" same="" size="" as="" in="" part="">

(c) Suppose increases in money also affect expected inflation. Specifically, assume that dπe/dm is exogenous, with dπe/dm > 0. Continue to assume 0 < dp/dm="">< 1.="" find="" an="" expression="" for="" dr/dm.="" does="" an="" increase="" in="" the="" money="" supply="" lower="" the="" real="" interest="" rate?="" does="" achieving="" a="" given="" change="" in="" r="" require="" a="" change="" in="" m="" smaller,="" larger,="" or="" the="" same="" size="" as="" in="" part="">

(d) Suppose there is complete and instantaneous price adjustment: dp/dm = 1, dπe /dm = 0. Find an expression for dr/dm. Does an increase in the money supply lower the real interest rate?

Answers

Maurice Tutor
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Status NEW Posted 15 Jan 2018 09:01 PM My Price 9.00

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