Exercise 5. Consider an economy in which the demand for money is of the form Y/(1 +i¿) for t = 0, 1, 2, . . ., where Y denotes a constant level of output and i, denotes the nominal interest rate in period t. The real interest rate, denoted r, is constant and equal to 4%. In period 0, the nominal interest rate is 15%, and the money supply is 100. People have rational expectations. In period 1, the central bank surprises people and sets the money supply to 104 and announces that starting in period 2 the money supply will grow at 2 percent forever, that is, M¿/M,-1= 1.02 for t = 2, 3, .. .. Find the inflation rate in period 1. Compare it to E,1. %3D

Exercise 5. Consider an economy in which the demand for money is of the form Y/(1 +i¿) for t = 0, 1, 2, . . ., where Y denotes a constant level of output and i, denotes the nominal interest rate in period t. The real interest rate, denoted r, is constant and equal to 4%. In period 0, the nominal interest rate is 15%, and the money supply is 100. People have rational expectations. In period 1, the central bank surprises people and sets the money supply to 104 and announces that starting in period 2 the money supply will grow at 2 percent forever, that is, M¿/M,-1= 1.02 for t = 2, 3, .. .. Find the inflation rate in period 1. Compare it to E,1. %3D

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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