Suppose that the economy of Metroville can be characterized by the following equations:
Long run aggregate growth for Metroville is:
Y L → = 2
Money growth is given as:
M → = 3
Money velocity growth is:
V → = 5 C → + 4 I → + 2 G → + N X →
Initially, assume C=I=G=NX = 0
What is the long run equilibrium growth rate?
What is the long run equilibrium inflation rate?
Suppose that investment growth falls to
I → = − 1
Think about which curve this shock moves.
Calculate the new short-run output growth rate:
- Suppose that investment growth falls to
I → = − 1
Think about which curve this shock moves.
Calculate the new short-run output inflation rate:
5) Suppose that investment growth falls to
I → = − 1
Think about which curve this shock moves.
Assuming the shock does not dissipate (or return back to its original level), what is the new long-run inflation rate?
6) Suppose that investment growth falls to
I → = − 1
Think about which curve this shock moves.
Assuming the shock does not dissipate (or return back to its original level), what is the new long-run output?