Provide economic interpretations for these equations

Reference no: EM13926016

Consider the following variant of the Sargent and Wallace/Brock model of forward determination of the price level:

mt - pt = -α(rt + (Et(pt+1) - pt)) + yt (1.61)
yt = -βrt (1.62)
yt = d(pt - Et-1pt), (1.63)

where all notation is standard and all variables (except for rt) are in natural logs.

(a) Provide economic interpretations for these equations.

(b) Suppose the money stock has been growing for since time t = 0 at rate γ, and is expected to grow at that rate forever. Define m0 = m¯ . Solve for all endogenous variables at time t. (Hint: For this part and the next two, it isn't necessary to use recursive substitution to solve the expectational difference equation. Use intuition to get a much simpler solution.)

(c) Suppose the assumptions of the previous question hold, but unex- pectedly at time T the money stock jumps by an amount E. This jump is expected never to happen again. Solve for all endogenous variables.

(d) Now assume instead that at T , the subsequent growth rate of the money stock is expected to increase to γ + E and remain permanently at that rate. Solve for all endogenous variables.

Reference no: EM13926016

Questions Cloud

What is the annual net cash cost : A bond with a face value of $200,000 and a quoted price of 102? has a selling price of $240.225

Community-awareness campaign : The local cancer society is beginning a community-awareness campaign. The text states that executives are the face of the organization. In your awareness campaign, discuss three tactics aimed at the community that would add to the visibility of yo..

Government antishatter regulations : 1. An article in the Wall Street Journal reported that large hotel chains, such as Marriott, are tending to reduce the number of hotels that they franchise to outside owners and increase the number the chain owns and manages itself.

Automated monitoring tools play : As a network architect, you will be responsible for the logical and physical design of the network. Describe the differences between logical design and physical design. How does creating the logical design help the architect with the physical desi..

Provide economic interpretations for these equations : Suppose the assumptions of the previous question hold, but unex- pectedly at time T the money stock jumps by an amount E. This jump is expected never to happen again. Solve for all endogenous variables.

Balance in the allowance for doubtful accounts : Flip determined that the balance in the Allowance for Doubtful Accounts should be $2,650 after an aging of A/R schedule was completed.

Why does the justification for exercising an american call : The following option prices were observed for a stock on July 6 of a particular year. Why does the justification for exercising an American call early not hold up when considering an American put?

A one year term to maturity affect the accounting equation : How does issuing an $8,000 discount note with an 8 percent discount rate and a one year term to maturity affect the accounting equation?

Transformation processes add value : 2) Three things you can do to transform your own work such that you become more efficient are to reduce procrastination, increase multitasking, and increase the use of checklists.( ) 3) Opeations management works in exactly the same way for manufa..

User Account

All Pages