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Problem 3 In the Friedman-Lucas money surprise model, there is a negative money demand shock. Neither private sector economic agents nor the central bank can
Problem 3 In the Friedman-Lucas money surprise model, there is a negative money demand shock. Neither private sector economic agents nor the central bank can observe the shock directly. Assume that the central bank is committed to money growth targeting. 1. How will it affect the labour, goods and money markets? Show graphically. 2. Argue that the shock could result in inefficient outcomes. Explain using diagrams
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