Super neutrality and changes in money growth

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“Super Neutrality” and Changes in Money Growth in the RBC Macro Model.

Consider the basic flexible-price, market-clearing model (which satisfies the Classical Dichotomy) in which r and Y are constant as long as there are no shocks to preferences or technology. The nominal stock of money is growing at rate μ so that:

Mt = Mt-1(1+μ), μ > 0.

Show the money-market clearing condition which determines the price level (P) at any time t.

For r and Y constant, what is the equilibrium rate of inflation and the equilibrium nominal interest rate? Explain.

In a diagram with ln(P) and ln(M) on the vertical axis and time on the horizontal axis, show the time paths of ln(P) and ln(M). (Hint: The nice thing about graphing ln(x) -- the natural log of x -- is that a constant rate of growth of x means that ln(x) is linear.)

Reference no: EM131424751

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