1) Consider the following equation: ln(PM)t=aytbRt where M denotes M1 in a closed economy; P is the average price level; y is the natural log of real output; and R is the nominal interest rate a) In no more than 4 sentences, explain (i) what this equation represents; (ii) the meaning of the coefficients ' a ' and ' b '; and (iii) suggest a plausible value for ' a ' and a plausible value for ' b ' based on the mainstream economic literature discussed in class and in the assigned readings. b) Now consider the following modification to the equation above: lnMt=lnPt+aytbrtbt+1 where e is expected inflation. In no more than 4 sentences, explain what ' r ' is and why traditional classical models consider ' r ' independent of monetary policy (hint: natural v. bank interest rate). 1) Consider the following equation: ln(PM)t=aytbRt where M denotes M1 in a closed economy; P is the average price level; y is the natural log of real output; and R is the nominal interest rate a) In no more than 4 sentences, explain (i) what this equation represents; (ii) the meaning of the coefficients ' a ' and ' b '; and (iii) suggest a plausible value for ' a ' and a plausible value for ' b ' based on the mainstream economic literature discussed in class and in the assigned readings. b) Now consider the following modification to the equation above: lnMt=lnPt+aytbrtbt+1 where e is expected inflation. In no more than 4 sentences, explain what ' r ' is and why traditional classical models consider ' r ' independent of monetary policy (hint: natural v. bank interest rate)