Question
Consider the forecasting problems under the long-run general monetary model where money demand is a function of both real income and nominal interest rate. With
Consider the forecasting problems under the long-run general monetary model where money demand is a function of both real income and nominal interest rate. With the usual "all-else-equal" assumptions regarding the growth rates of all foreign variables and domestic income, we learn in time T, that the domestic country is lowering the rate of money growth from some fixed rate X to Y (e.g., from 5% to 3%). Illustrate how other domestic variables' profiles change by using the diagram below to linearly project their path after time T. For the real exchange rate, it's normalized at 1 in year T as indicated by the star mark. In this question, do not provide any explanations, but only plot the variables after time T. In addition, when you replicate the plots, you don't need to re-write the titles or label the horizontal axis (which is time) but you do need to indicate the variables.
Home money supply, M Home real money balances, M/P, and nominal interest rate, i M/P time time T T Home price level, P Home nominal exchange rate, E Home real exchange rate (T=1) 2.0+ 1.5 1.0 0.5 time time time T TStep by Step Solution
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