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

Consider a household with wealth of $62,000. If the price level decreases by 8%, this household is expected to its consumption because of the decrease; deflationary effect decrease; wealth effect increase; wealth effect decrease; income effect increase; interest rate effect

The.... real interest rate will be greater than the .... real interest rate when the .... rate of inflation is ...... than the .... rate of inflation a) actual / expected / ex-post / greater / ex-ante b) ex-post / ex-ante / actual / less / expected c) ex-post / ex-ante / actual / greater / expected d) actual / expected / ex-post / less / ex-ante e) actual / expected / ex-post / more severe / ex-ante

Let's consider the effects of an introduction of the ATM machines (back in the 1980s). Imagine that the cost of going to the bank and exchange money for bonds or bonds for money is y cookies. Imagine also that the nominal interest rate is R, the price level is P and the REAL income that consumers will want to spend is y. Imagine that the entire yearly income is transferred to their bank accounts at the beginning of the year. Consumers consume continuously throughout the year. (a) What is the TOTAL cost of holding M dollars on average over the year? (Note: the total cost is the sum of the opportunity cost and the cost of going to the bank N times a year). (b) What is the relation between the number of trips to the bank, N, and the average money demand, M? (c) What is the optimal money demand? What are the factors that affect money demand? Explain each factor INTUITIVELY. (d) What is the effect of the introduction of the ATM machine on p? (e) What is the effect of the introduction of the…