Kenneth Lingenfelter week 6 Homework

3b if firms and workers expect that monetary policy

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3b. If firms and workers expect that monetary policy makers will maintain the price level at 1.2, then when the decline in the real exchange rate is expected to persist, monetary policymakers must take action so as to reduce aggregate demand so that aggregate demand and long-run aggregate supply are equal to 12,000 at a price level of 1.2. That reduction in aggregate demand would require a decrease in the nominal money supply. On the other hand, if the decline in the real exchange is only temporary and so also is the increase in aggregate demand, then monetary policymakers would have to increase aggregate demand so as to keep aggregate demand and long-run aggregate supply equal to 12,000 at a price level of 1.2. That would require an increase in the nominal money supply. 3c. Policymakers, workers, and firms would look to data from the foreign exchange markets and economic conditions in the rest of the world in an attempt to determine if there were changes in any of these areas that would cause the decline in the real exchange rate to either persist or only
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be temporary in nature. They should be able to figure out how monetary policymakers can signal to firms and workers what they know about the change in the real exchange rate via a change in the nominal money supply if workers and firms expect monetary policymakers to maintain the price level at 1.2. Gordon, Robert J. (2012). Macroeconomics: Macroeconomics. Boston, MA: Pearson Education, Inc., Rights and Contracts Department.
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