Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non- monetary assets be -0.2. Imagine that real income increased by 2.75% and nominal interest rate on non-monetary assets increased by 0.2%. Also, suppose that the central bank wants inflation to be below 2%. If the central bank increased money supply by 4.2%, was it able to achieve its inflation target?

Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non- monetary assets be -0.2. Imagine that real income increased by 2.75% and nominal interest rate on non-monetary assets increased by 0.2%. Also, suppose that the central bank wants inflation to be below 2%. If the central bank increased money supply by 4.2%, was it able to achieve its inflation target?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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