What happens to the price level pt when the money growth, Ask an Expert

Economics

In the Cagan model, if the money supply is expected to grow at some constant rate m (so that Emt+ s = mt + sm), then Equation A9 can be shown to imply that pt = mt + gm.

a. Interpret this result.

b. What happens to the price level pt when the money supply mt changes, holding the money growth rate m constant?

c. What happens to the price level pt when the money growth rate m changes, holding the current money supply mt constant?

d. If a central bank is about to reduce the rate of money growth m but wants to hold the price level pt constant, what should it do with mt? Can you see any practical problems that might arise in following such a policy?

e. How do your previous answers change in the special case where money demand does not depend on the expected rate of inflation (so that g = 0)?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M948126

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