Consider an economy where the production function is given by Y = K^(1/2)L^(1/2). The level of capital in the economy equals 400, and the number of employed workers is 225. Suppose the quantity of money in the economy equals 200, and the velocity of money circulation is constant and equals 5. Suppose initially the economy is in the long-run equilibrium.
1. Use the quantity theory of money to determine the aggregate demand in the economy.
2. Determine the equilibrium output and the price level in period 0.
3. Suppose in period 1 the central bank decreases money supply by 50. What will happen to output in the short-run?
4. Is monetary policy neutral in the short-run?
5. What will be the equilibrium price level and output after prices adjust to the shock?
6. Is monetary policy neutral in the long-run?
Consider an economy where the production function is given by Y = K^(1/2)L^(1/2). The level of capital in the economy equals 400, and the number of employed workers is 225. Suppose the quantity of money in the economy equals 200, and the velocity of money circulation is constant and equals 5. Suppose initially the economy is in the long-run equilibrium.
1. Use the quantity theory of money to determine the aggregate demand in the economy.
2. Determine the equilibrium output and the price level in period 0.
3. Suppose in period 1 the central bank decreases money supply by 50. What will happen to output in the short-run?
4. Is monetary policy neutral in the short-run?
5. What will be the equilibrium price level and output after prices adjust to the shock?
6. Is monetary policy neutral in the long-run?
