HW8_Ch7 - Name: ____________________________________...

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Unformatted text preview: 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 Md/P = 750 + .2Y 4000(r + e) Suppose that the central bank changes the money supply based on the actual inflation rate and the level of income: Ms = 2455 +.1Y 3000. a. If the actual rate of inflation equals the expected rate of inflation equals .04, Y = 1150 and r = .03, calculate the price level. /40 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. 2. The following equations characterize a country's economy. /40 Production function: Y = AKN N2. Marginal product of labor: MPN = AK 2N. where A = 6 and K = 40. Labor supply: NS = 20 + 2w. Desired Consumption: Cd = 1000 + .6Y 2000r Desired Investment: Id = 2500 8000r Government Spending: G = 2500 Real Money Demand: L = 2000 + .3Y 2500(r + e) Money Supply: M = 30,000 Expected Inflation: e = .04 (a) Find the equilibrium levels of the real wage, employment and output. (b) Find the equilibrium level of the real interest rate, consumption, investment and national saving. (c) Find the equilibrium level of the price level. /20 3. The income elasticity of money demand is 2/3 and the interest elasticity of money demand is 0.1. Real income is expected to grow by 4.5% over the next year, and the real interest rate is expected to remain constant over the next year. The rate of inflation has been zero for several years. (a) If the central bank wants zero inflation over the next year, what growth rate of the nominal money supply should it choose? (b) By how much will velocity change over the next year if the central bank follows the policy that achieves zero inflation? ...
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This note was uploaded on 09/15/2009 for the course ECON 304 taught by Professor Stone,mistyriano,alejandro during the Fall '07 term at Pennsylvania State University, University Park.

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