4. [A Monetary Surprise] Consider an economy in which the demand for money is of the form M₁ = = P₁Y for t= 0, 1, 2,..., where output is 150, the money velocity is 1.5. The money supply is 100 for t = 0, 1. In period 2, the central bank surprises people and announce that money supply will grow at 2 percent forever, that is, Mo 100, M₁100, M₂ 100, M₂ (1.02) M₁, M3 (1.02) M₂, and so on. 1 (a) What is the inflation rate in period 1, ₁? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E12? (b) What is the inflation rate in period 2, ₂? What is real money balance in period 2, M2? What is expected inflation in period 3, given the informa- tion available in period 2, E₂3? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and ₂.
4. [A Monetary Surprise] Consider an economy in which the demand for money is of the form M₁ = = P₁Y for t= 0, 1, 2,..., where output is 150, the money velocity is 1.5. The money supply is 100 for t = 0, 1. In period 2, the central bank surprises people and announce that money supply will grow at 2 percent forever, that is, Mo 100, M₁100, M₂ 100, M₂ (1.02) M₁, M3 (1.02) M₂, and so on. 1 (a) What is the inflation rate in period 1, ₁? What is real money balance in period 1, ? What is the expected inflation in period 2, given the information available in period 1, E12? (b) What is the inflation rate in period 2, ₂? What is real money balance in period 2, M2? What is expected inflation in period 3, given the informa- tion available in period 2, E₂3? (c) What is the inflation rate in period 3, 73? What is real money balance in period 2, ? (d) Compare E₁₂ and ₂.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter22: Money Growth And Inflation
Section: Chapter Questions
Problem 1PA
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Question
![4. [A Monetary Surprise] Consider an economy in which the demand for money
is of the form
M₁ = = P₁Y
for t = 0, 1,2,..., where output is 150, the money velocity is 1.5. The money
supply is 100 for t = 0, 1. In period 2, the central bank surprises people and
announce that money supply will grow at 2 percent forever, that is, Mo
=
100, M₁ = 100, M₂ = (1.02) M₁, M3 (1.02) M₂, and so on.
(a) What is the inflation rate in period 1, 7? What is real money balance
in period 1, ? What is the expected inflation in period 2, given the
information available in period 1, E172?
(b) What is the inflation rate in period 2, m₂? What is real money balance in
period 2, 2? What is expected inflation in period 3, given the informa-
tion available in period 2, E273?
(c) What is the inflation rate in period 3, 73? What is real money balance in
period 2, ?
(d) Compare E₁₂ and 7₂.
B](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9da28e61-3322-4a1f-a444-7b79daf82c5f%2Fc536ad41-61b5-4842-96c5-2d434c95c4b1%2F09yxfg8_processed.jpeg&w=3840&q=75)
Transcribed Image Text:4. [A Monetary Surprise] Consider an economy in which the demand for money
is of the form
M₁ = = P₁Y
for t = 0, 1,2,..., where output is 150, the money velocity is 1.5. The money
supply is 100 for t = 0, 1. In period 2, the central bank surprises people and
announce that money supply will grow at 2 percent forever, that is, Mo
=
100, M₁ = 100, M₂ = (1.02) M₁, M3 (1.02) M₂, and so on.
(a) What is the inflation rate in period 1, 7? What is real money balance
in period 1, ? What is the expected inflation in period 2, given the
information available in period 1, E172?
(b) What is the inflation rate in period 2, m₂? What is real money balance in
period 2, 2? What is expected inflation in period 3, given the informa-
tion available in period 2, E273?
(c) What is the inflation rate in period 3, 73? What is real money balance in
period 2, ?
(d) Compare E₁₂ and 7₂.
B
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