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Recall the model of Medieval Economy: MV = PLY Y = ALL Pt+1 LL . L (a) Suppose I = 2, V = 1, =
Recall the model of Medieval Economy: MV = PLY Y = ALL Pt+1 LL . L (a) Suppose I = 2, V = 1, = 1, M = M = 6, 7 = 0.2 solve for steady state P,L and Y. (b) Suppose money supply increases, M = M = 12, all the other exogenous variables are the same as before. After t years, the economy reached a new steady state. What is the new steady state PL and Y? (c) Calculate the levels of P, Y for periods t=-1 (the day before the change) and t = 0,1,2,3. (d) Use graphs draw the transition dynamics of Pt, Yt over time. (e) Which parameter is the key to determine t (the convergence speed)? What would be the evolution of P and Y overtime if () = 1? Given that ( controls the level of price stickiness, briefly discuss the connection between monetary non-neutrality (the real effect of money) and price stickiness. (f) If instead money supply decreases,
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