Suppose that money plays the role of a sunspot variable in the coordination failure model, so that the economy is in the bad equilibrium when the money supply is low and in the good equilibrium when the money supply is high. Explain what the monetary authority could do to make consumers better off. Compare this prescription for monetary policy with the one coming from the money surprise model, and discuss.
Answer to relevant QuestionsIn the coordination failure model, suppose that consumers’ preferences shift so that they want to consume less leisure and more consumption goods. Determine the effects on aggregate variables in the good equilibrium and in ...Repeat question (8) for the liquidity trap case where interest is paid on reserves and there are excess reserves held in the financial system. Explain your results and discuss.In the New Keynesian model, suppose that in the short run the central bank cannot observe aggregate output or the shocks that hit the economy. However, the central bank would like to come as close as possible to economic ...In Chapter 13, we studied how persistent total factor productivity shocks in a closed economy can provide an explanation for business cycles. In the second model studied in this chapter, with production and investment, ...Suppose that capital controls take the form of a total ban on capital inflows, but all capital outflows are permitted. Also suppose that initially the current account surplus is zero. Determine the effects of a temporary ...
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