Question: 2.Assume: Money demand function is: M dt = P it Y t r t U t1 ; Aggregate demand function is: Y dt = (s

2.Assume:

Money demand function is: M_dt= P_itY_tr_tU_t1; Aggregate demand function is: Y_dt= (s_t+ P_t* - P_t) -(r_t+ P_t- P_t+1/t) + Y_n+ U_t2; Aggregate supply function is: Y_st= (P_t- W_t) + U_t3; The authorities have two objectives: price and output stability. The authorities will wish to minimize the value of the following objective function: If there is a transitory money demand shock,

how will the two objectivesprice and output stabilitybe affected? (Hint: Using the Md, Yd and Ys schedules to show your conclusions.)(20')

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