Answer to Question #186459 in Microeconomics for Edward Kamutuva

Question

Suppose that the real money demand function is 𝐿(𝑌, 𝑟 + 𝜋 𝑒 = 0.3𝑌 𝑟 + 𝜋 𝑒 Where Y is real output, r is the real interest rate, and πe is the expected rate of inflation. Real output is constant over time at Y = 1500. The real interest rate is fixed in the goods market at r = 0.5 per year. (a) Suppose that the nominal money supply is growing at the rate of 10% per year and that this growth rate is expected to persist for ever. Currently, the nominal money supply is M = 400. What are the values of the real money supply and the current price level? (Hint: What is the value of the expected inflation rate that enters the money demand function?). (10) (b) Suppose that the nominal money supply is M = 400. The Bank of Namibia announces that from now on the nominal money supply will grow at the rate of 5% per year. If everyone believes this announcement, and if all markets are in equilibrium, what are the values of real money supply and the current price level? (10)

Answer 1

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