Suppose the money demand of individuals and firms depends on what they perceive to be the probabilities that the economy will expand or contract over the following six months
Suppose their money demand is given by the equation L = 0.5Y - 100i + 20z, where z is the probability that the economy is expanding six months in the future. If z = 1, the economy will certainly be in recovery, if z = 0, the economy will certainly be in recession, and for z between 0 and 1 there is some uncertainty about the future state of the economy. Use a classical (RBC) model of the economy. If the Fed moves the money supply to target the price level, how does the money supply relate to the expected future state of the economy? Is this an example of reverse causation?
For a given level of real output and the nominal interest rate, to target the price level means that the nominal money supply moves directly with z (so that ?M = 20?z). This a version of reverse causation because the probability of higher future output affects the money supply today.
You might also like to view...
The primary function of the reserve requirements imposed by the Fed upon commercial banks is to
A) assure that Federal Reserve Banks will receive deposits with which they can purchase income-earning assets. B) enable the government to borrow in emergencies. C) protect the liquidity of the banking and monetary system. D) protect the solvency of the commercial banking system. E) serve as a control lever for central banking authorities.
Reducing the marginal tax rate on income will
A) raise the return to entrepreneurship and encourage the opening of new businesses. B) increase the after-tax return on saving, and encourage saving. C) reduce the tax wedge faced by workers and increase labor supplied. D) All of the above are correct.
As the price of milk increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of cereal? (Milk and cereal are complements.)
A) Equilibrium price would increase and equilibrium quantity would decrease. B) Equilibrium price and quantity would both decrease. C) Equilibrium price would decrease and equilibrium quantity would increase. D) Equilibrium price and quantity would both increase.
Why has the pace of structural change in financial markets accelerated in recent years?
What will be an ideal response?