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Question

In the following model, is the log of the money supply, the log

of the price level, the log of output, and −1 is the rational expectation of formed with information on period −1 data:
= +
= ∗+0.5 {( − −1 )+( − −2 )}
= − ( −1− ∗)+
∗and are constants; , are both positive; is an i.i.d. error term.
(a) Briefly explain each equation.
(b) What is the solution for output and inflation?
(c) Does monetary feedback policy have an effect on output in this model? Briefly explain your answer.

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