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Recall the model of Medieval Economy: MV = PYt Y = LL %3D () P+1 L = P L (a) Suppose L = 2,

Recall the model of Medieval Economy: MV = PYt Y = LL %3D ()" P+1 L = P L (a) Suppose L = 2, V = 1, A = 1, M = M = 6, 0 = 0.2 solve for steady state P,L and Y. (b) Suppose money supply increases, Mt = M = 12, all the other exogenous variables are the same as before. After t1 years, the economy reached a new steady state. What is the new steady state P,L 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. (c) Which parameter is the key to determine t1 (the convergence speed)? What would be the evolution of P and Y overtime if 0 = 1? Given that 0 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, M < M, directly illustrate the transition dynamics of Pt, Y on a graph.

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