Aggregate supply is determined by the function Y₁ = a + B(P₁-P₁,-₁) + u₁ t,t-l u₁ = pu₁_1 + e, e₁ is a random variable, having E(e,) = 0, Var(e) = o. a) Compute E(Y) under the assumption that expectations are rational. Interpret the result you obtain. b) Supposing that the government introduced a monetary policy rule of the form where m₁ = μ₁ m₁_₁ + M₂Y₁-1 Would this have any effect on E₁_₁(Y)? c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the result you have demonstrated in b) with this proposition.
Aggregate supply is determined by the function Y₁ = a + B(P₁-P₁,-₁) + u₁ t,t-l u₁ = pu₁_1 + e, e₁ is a random variable, having E(e,) = 0, Var(e) = o. a) Compute E(Y) under the assumption that expectations are rational. Interpret the result you obtain. b) Supposing that the government introduced a monetary policy rule of the form where m₁ = μ₁ m₁_₁ + M₂Y₁-1 Would this have any effect on E₁_₁(Y)? c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the result you have demonstrated in b) with this proposition.
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter2: Fundamental Economic Concepts
Section: Chapter Questions
Problem 5E
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Question
Note:hand written solution should be avoided.
![Aggregate supply is determined by the function
Y₁ = a + ß(P₂ - P₁,-₁) + u₁
pe
t,t-1
u₁ = pu₁_₁ + e₁
where
e,
is a random variable, having E(e,)=0, Var(e) = o.
a) Compute E₁₁(Y) under the assumption that expectations are rational. Interpret the result
you obtain.
b) Supposing that the government introduced a monetary policy rule of the form
m₂ = μ₁ M₂₁_₁ + M₂Y₁-1
Would this have any effect on E₁₁(Y,)?
c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the
result you have demonstrated in b) with this proposition.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F320f5ab0-8632-4baf-8fdf-cd296dee65b6%2Fd663168d-a65e-478e-80bb-62f9b787cbab%2F24i5508_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Aggregate supply is determined by the function
Y₁ = a + ß(P₂ - P₁,-₁) + u₁
pe
t,t-1
u₁ = pu₁_₁ + e₁
where
e,
is a random variable, having E(e,)=0, Var(e) = o.
a) Compute E₁₁(Y) under the assumption that expectations are rational. Interpret the result
you obtain.
b) Supposing that the government introduced a monetary policy rule of the form
m₂ = μ₁ M₂₁_₁ + M₂Y₁-1
Would this have any effect on E₁₁(Y,)?
c) Explain the "Policy Ineffective Proposition" that we discussed in class and compare the
result you have demonstrated in b) with this proposition.
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