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Consider a classical economy in which the full employment rate of output is yt = 200, the money demand function Mt/Pt = 0.3 yt/Rt, and
Consider a classical economy in which the full employment rate of output is yt = 200, the money demand function Mt/Pt = 0.3 yt/Rt, and saving-investment behavior satisfies yt = 250 - 1000rt. (Here rt and Rt are real and nominal interest rates, measured in fractional units.) If the central bank creates money at a rate of 10 percent per period, what will be the steady-state values of the nominal interest rate and the real quantity of money?
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