Name: ____________________________________
Section Number: ____
Recitation Leader’s Name: _____________________________
Homework 8, Due April 9
at the beginning of class
1.
Suppose the money demand function is given by
M
d
/
P
= 750 + .2
Y
– 4000(
r
+
π
e
)
Suppose that the central bank changes the money supply based on the actual inflation rate and
the level of income:
M
s
= 2455 +.1
Y
– 3000
π
.
a.
If the actual rate of inflation equals the expected rate of inflation equals .04,
Y
= 1150
and
r
= .03, calculate the price level.
b.
If actual inflation decreases to .02 while the other variables remain as in part (a).
Calculate the price level.
c.
If the expected rate of inflation decreases to .02 while the other variables remain as in
part (a), calculate the price level.
/40
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2. The following equations characterize a country’s economy.
Production function
: Y = A
·
K
·
N –N
2
.
Marginal product of labor
: MPN = A
·
K – 2N.
where A = 6 and K = 40.
Labor supply
: N
S
= 20 + 2w.
Desired Consumption
: C
d
= 1000 + .6Y – 2000r
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 Fall '07
 STONE,MISTYRIANO,ALEJANDRO
 Macroeconomics, Inflation, price level, money demand, actual inflation rate

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