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1. In the Fischer model, we change the aggregate supply and demand curves to Y = Pt Et-1 Pt + Ut Y = Mt -
1. In the Fischer model, we change the aggregate supply and demand curves to Y = Pt Et-1 Pt + Ut Y = Mt - Pt That is, there is no demand shock but there is a supply shock ut. The shock is an AR(1) process Ut put-1 + et, where ez is a zero-mean white noise. Everything else of the model is the same as the one discussed in class. a) For the case of a one-period contract, show that money has no effect on output. b) For the case of a two-period contract, show that money can make output less volatile. c) How does your answer change if the supply shock is white noise instead of an AR(1) process
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