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Econ 154a Problem Set 7

# Econ 154a Problem Set 7 - I Problem 1 1 The first step in...

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I. Problem 1 1. The first step in the analysis of the Two-Period Model with Money is to determine the effects on the savings and investment equilibrium. When A increase, S d shifts to the right, this causes an increase in both present and future production and a decrease in the real interest rate. Next, it is observed that the increase in production and the decrease in the real interest rate both act to increase m d,f . Using the money-market graph, it can be seen that this lowers the future price level. Finally, the decrease in the future price level increases the demand for current real balances, which results in an increase in the present supply of real balances, m, and a decrease in the present price level, P. 2. m s = M/P. In the analysis of the effect of an increase in present productivity on present price level, it was determined that the price level increases in the end because the demand for current real balances increases. The Central Bank can off-set this change in price-level by increasing the m s curve. Since the m s curve is given by M/P, this is equivalent to an increase in the present nominal money supply, M (by some amount greater than the increase in the current price level P). Additionally, it is important to note that this will not effect any other parts of the analysis because the real goods-market equilibrium is assumed to be unaffected by the presence of money and the future asset-market equilibrium is not affected by the current nominal money supply.

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• Fall '07
• BjoernBruegemann
• Macroeconomics, Inflation, price level, Real Balances, Procyclical Procyclical Procyclical Acyclical Procyclical Procyclical Procyclical Procyclical Model Procyclical Procyclical Procyclical Procyclical Countercyclical Acyclical Acyclical Acyclical

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Econ 154a Problem Set 7 - I Problem 1 1 The first step in...

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