Suppose the Money Demand of Individuals and Firms Depends on What

question 64

Essay

Suppose the money demand of individuals and firms depends on what they perceive to be the probabilities that the economy will expand or contract over the following six months.Suppose their money demand is given by the equation L = 0.5Y - 100i + 20z,where z is the probability that the economy is expanding six months in the future.If z = 1,the economy will certainly be in recovery,if z = 0,the economy will certainly be in recession,and for z between 0 and 1 there is some uncertainty about the future state of the economy.Use a classical (RBC)model of the economy.If the Fed moves the money supply to target the price level,how does the money supply relate to the expected future state of the economy? Is this an example of reverse causation?

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Definitions:

Insensibility

The lack of physical sensation or the inability to react to sensory stimuli.

Pain

An unpleasant sensory and emotional experience associated with actual or potential tissue damage.

Touch

The sense by which objects or pressure are perceived through the skin, vital for human perception and interaction.

Aseptic Technique

A set of specific practices and procedures performed under carefully controlled conditions with the aim of minimizing contamination by pathogens.