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Section Numbe 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 + Cite)
Suppose that the central bank changes the money supply based on the actual inﬂation rate and /40 the level of income:
Ms = 2455 +.1Y— 300091. a. If the actual rate of inﬂation equals the expected rate of inﬂation equals .04, Y = 1150
and r = .03, calculate the price level. BE: #50+,2,U)5o) ‘14000(903ta043:#00
l) (log):QL{50 M "git455+ , uh’boi — 3000
EQMa %o ; 2&0 tarp; F3 b. If actual inﬂation decreases to .02 while the other variables remain as in part (a).
Calculate the price level. game
Magu%5+, I (H503~5ooo(oo;®= 95W EW: area: gm :7 c. If the expected rate of inﬂation decreases to .02 while the other variables remain as in
part (a), calculate the price level. Mp9: Hrzao’i “ZLUlLK—DQbe Hgoo(,o%+pogv> .: M: Qureo 2. The following equations characterize a country’s economy.
. 9/
y ': O N ’ 10 Production function: Y = A'K'N —N2. _
MW) 1 gqo r 3: M /40 Marginal product of labor: MPN = A‘K — 2N. where A = 6 and K = 40. Labor supply: NS = 20 + 2w.
Desired Consumption: CC1 = 1000 + .6Y — 2000r
Desired Investment: Id = 2500 — 8000r Government Spending: G = 2500
Real Money Demand: L = 2000 + .3Y — 2500(r + ate) Money Supply: M = 30,000
Expected Inﬂation: W = .04 d2 ~o+ U00" @000? (3) Find the equilibrium levels of the real wage, employment and output.
mammam QLJDLO:HO+leo
MD 1 014,40 gLO 0’20 $500 0%
EQH" (QUO’ 3£0+va N2Q0+2k403 (it (b) Find the equilibrium level of the real interest rate, consumption, investment and national saving. Cd:é{rgoo«&ooo(:04> 6d” lLi)OOO~O{LlOO~+;LOCﬁ”wQVbOO
' ’ 006W) ' , sdzgatou—Jraoovr’ H '
1262M: 3/} 00+ QOW':Q\<DOO~ gooor
[OOOOrj L300 33 ﬂgiooﬂtooototl) (c) Find the equilibrium level of the price level. 0603 ~ ﬁEooLOLHoLl) 1 (0000 L: 02,000+ . (M, 7'; £UO(IOOl ".QQDBQJ 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. /20 (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? NV :?\/ ’50 2mm ramV :QOAP+670AK/
.DE’3t 90M 1 0+ voting ...
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 Fall '07
 STONE,MISTYRIANO,ALEJANDRO
 Macroeconomics

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