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ECO - Consider a classical long-run economy described by the following equations

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Question;Consider a classical long-run economy described by the following equations;Y = C + I + G;Y = AL K;A= 50;L= 400;K = 100;G= 0;T = 0;C = 1000 + o.7 (Y-T);I = 4000 - 150r;(M/P) = L (i,Y) =0.6 Y -100i;M= 10000;E = 2Note that M is money supply, and E is expected infation.(a) (30 marks) Find the price level P in this economy.(b) (5 marks) What if people started to think that the central bank will pursuean inflationary policy in the future, such that E rises to 5. Show how thisincrease in expected inflation impacts the price level today.

 

Paper#57659 | Written in 18-Jul-2015

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