Maurice Tutor

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Category > Management Posted 28 Feb 2018 My Price 7.00

money demand function

Suppose that the real money demand function is

where Y is real output, r is the real interest rate, and πe is the expected rate of inflation. Real output is constant over time at Y = 150. The real interest rate is fixed in the goods market at r = 0.05 per year.

a. Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist forever. Currently, the nominal money supply is M = 300. What are the values of the real money supply and the current price level?

b. Suppose that the nominal money supply is M = 300. The central bank announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of the real money supply and the current price level? Explain the effects on the real money supply and the current price level of a slowdown in the rate of money growth.

Answers

Maurice Tutor
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Status NEW Posted 28 Feb 2018 07:02 PM My Price 7.00

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