Aggregate supply is determined by the function Y₁ = a + B(P₁-P₁,-₁) + u₁ t,t-l u₁ = pu₁_1 + e, e₁ is a random variable, having E(e,) = 0, Var(e) = o. a) Compute E(Y) under the assumption that expectations are rational. Interpret the result you obtain. b) Supposing that the government introduced a monetary policy rule of the form where m₁ = μ₁ m₁_₁ + M₂Y₁-1 Would this have any effect on E₁_₁(Y)? c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the result you have demonstrated in b) with this proposition.

Aggregate supply is determined by the function Y₁ = a + B(P₁-P₁,-₁) + u₁ t,t-l u₁ = pu₁_1 + e, e₁ is a random variable, having E(e,) = 0, Var(e) = o. a) Compute E(Y) under the assumption that expectations are rational. Interpret the result you obtain. b) Supposing that the government introduced a monetary policy rule of the form where m₁ = μ₁ m₁_₁ + M₂Y₁-1 Would this have any effect on E₁_₁(Y)? c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the result you have demonstrated in b) with this proposition.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter2: Fundamental Economic Concepts

Section: Chapter Questions

Problem 5E

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