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Consider the following money market equilibrium model: m: = m? = 30 + 131?: + .3291 + 537': where the demand of money is a
Consider the following money market equilibrium model: m: = m? = 30 + 131?: + .3291 + 537': where the demand of money is a function of the economy's price level, the degree of economic activity, and the equilibrium interest rate. Assume that in the longrim the prevailing relationship is as foli0ws: mi=pi=>0 which implies that m and p are cointegrated, and thus shortrim deviations in either variables would converge back to a point where m: = 530:. Consider the error correction model below: mt am [mhl m:_1) Apt all (mt-1 -H1:-1} In which case(s) would the system above converge back to a point where mg, 2 g); following a short run deviation from it? (a) IfnmU (c) Ifnm>DanddPll (e) Can you provide some economic intuition for the case(s} in which the adjustment to the longrun relationship occurs? Use a diagram if necessary
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