Reference no: EM131377622

Problem -

Consider the following log linear macroeconomic model:

(1) y_t = γ(p_t - E_t-1p_t)

(2) y_t = m_t - p_t

(3) m_t = m^- - μy_t + v_t

where y is the log of output given as a deviation from y*, the natural log level of output; m is the nominal level of the money supply; p is the aggregate price level; m^- is the anticipated level of the nominal money supply, v is a velocity shock, where v, ∼ N(0, σ²_v); γ > 0 is an elasticity and E_t is the mathematical expectations operator.

a) Interpret and explain the economic system laid out in equations (1)-(3).

b) Solve the model using the method of your choke for the equilibrium price and output.           

c) Critically evaluate the solutions derived in part b) and briefly discuss the ability of the model to match the stylized facts.