Question – 3 In the economy of Attica, prices are perfectly flexible and output is always at its full employment level V. Assume that the Quantity Theory of Money {QTM}

Question – 3 In the economy of Attica, prices are perfectly flexible and output is always at its full
employment level V. Assume that the Quantity Theory of Money {QTM} is valid. The
velocity of circulation of money is constant, and the stock of money, M, grows at a
constant rate, m. Aggregate demand, the 5 curve, is given by W = A — bffi — II”),
where R is the nominal rate of interest and HE is the expected rate of inflation. A and
b are constant parameters. [a] is the inflation rate, It; in Attica? [b] If the inhabitants of Attica have perfect foresight, what is the effect of increasing
the growth rate of money supply on real and nominal interest rates? is) Is the stock of real money balances affected by the rate of growth of the money
supply?

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