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 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E,n2 = E,n1, where E,n+1 denotes the expected value in periodt of inflation in period t+ 1. Find the inflation rate in period 1.
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 6. Consider the same economy as in the exercise 5, except that people do not have rational expectations. Assume instead that E,n2 = E,n1, where E,n+1 denotes the expected value in periodt of inflation in period t+ 1. Find the inflation rate in period 1.
Chapter13: Inflation
Section: Chapter Questions
Problem 12SQ
Related questions
Question
Thank you for answering Exercise 5. Please answer Exercise 6, thank you.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you