nominal interest rate, and the price level? TOTAL FOUR QUESTION new technologica
ID: 1097757 • Letter: N
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nominal interest rate, and the price level? TOTAL FOUR QUESTION new technological innovation comes on line. What are the current effects on aggregate output. consumption, investment, employment, the real wage, the real interest rate, the suppose, in the Friedman-Lucas money surprise model, that there are money demand shocks and shocks to total factor productivity. Neither private sector economic agents nor thee central bank can observe money demand shocks directly. Private sector economic agents cannot observe productivity shocks. However, the central bank can observe productivity hocks. How should the central bank conduct monetary policy? Discuss. Assume that there are no surprises, with all economic agents and the central bank having full information about shocks that are hitting the economy. Suppose that the central bank adopts a nominal GDP target, and interpret this in the model as a goal of maintaining some constant level of nominal GDP. a. Suppose that there is an increase in total [actor productivity. What should the central bank do in response, given its goal? What are the effects on aggregate variables? Explain. Now, suppose that there is a positive shift in the money demand function. What should the central bank do now? Determine the effects on aggregate variables. Explain. Suppose that there is an increase in the number of ATM machines in service. What are the effects of this innovation on the demand for money and on the price level?Explanation / Answer
When the number of ATM machines in service increases, the demand for money becomes more frequent, as a result, the price will rise.
9. a. When there is increase in total factor productivity, there will be increase in real output. Given the money supply, increase in real output will chasing less amount of money, and will cause deflationary tendency. Hence, to maintain the economy at constant level of nominal GDP, the central bank is required to increase money supply in proportion to increase in productivity. As a result income and employment will increase and will reach its natural level.
b. Given the target, the positive shift in the money demand will cause inflationary pressure in the economy. The nominal GDP will rise above the targeted level of nominal GDP. In this case the central bank will deploy contractionary monetary tools to bring the level of demand for money back to constant level. There will be no change in aggregate variables.
8. The unexpected shock in money demand is not possible to determined, however the productivity shock is observable by the central bank. If there is increase in productivity, the central bank needs to increase money supply in the economy, so that the problem of deflation does not arise. Similarly, if there is negative productivity shock, that decreases the potential GDP the central bank is required to reduce the money supply so that inflationary pressure does not built up.
When new technology come into force, then same amount of output can be produced with more efficiency. As a result, output, employment and income increases. With the increase in income, the consumption also increases, which further give boost to aggregate demand in the economy. The increase in aggregate demand and new technology will induce private investment. As for the real wage, it also increases with the improvement in technology.
With the improvement in technology, the real interest rate and nominal interest rate will rise, as the demand for investment increases.
On the other hand, due to improvement in technology, more can be produced with limited resources, hence price level will decrease.
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