Mulonvia is a closed economy not open to trade which

This preview shows page 2 - 5 out of 8 pages.

2.Mulonvia is a closed economy (not open to trade), which is characterized by the following equations: Where r is the real interest rate and i is the nominal interest rate, both in percent. Prices do not change in this economy. Therefore, inflation is zero (i.e. i=r). a.Assume that monetary policy sets the nominal interest rate at 3% and keeps it at that leel. Find consumption, investment and output in equilibrium. How could the FED guarantee that the nominal interest rate is 3%? (i.e. what is the money supply consistent with a nominal interest rate of 3% in equilibrium?) Show that, in equilibrium, total savings (private plus public) equals investment.
3 b.The FED chairman of Mulonvia decides to set money supply equal to 200: Ms=200. Plot Ms and Mdin (i,M) space for Y=1000. What is the equilibrium level of the interest rate and money supply? How would your answer change if Y=80. Provide economic intuition for the difference.
4

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture