Question: Short answer 3: Assume: Money demand function is: Mat = Pit + Y - or + Un; Aggregate demand function is: Y = 0(s, +

Short answer 3: Assume: Money demand function is: Mat = Pit + Y - or + Un; Aggregate demand function is: Y = 0(s, + P(* - P ) - P(It Aggregate supply function is: Y = \\(P, - W/) + Up; The authorities have two objectives: price and output stability. The authorities will wish to minimize the value of the following objective function: O(P. Y)=W(Y -Y) + (1-w)P-Pm) (0sws1) If there is a transitory money demand shock, how will the two objectives be affected? (Hint: Using the My. Yo and Y schedules to show your conclusions.)

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