The following problem illustrates Milton Friedman's money growth rule which is a center piece of the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The following problem illustrates Milton Friedman's money growth rule which is a center piece of the Monetarist thinking of macroeconomics. Suppose the economy is given by the following: Production Function: Yt= 10 Kt 0.4(Lt Et) 0.6 Consumption Function: Ct = 0.8 Yt Depreciation rate: 8 % (i.e. 8 = 0.08). Population growth: 2% (i.e. n= 0.02). Technological growth: 2 % (i.e. g= 0.02). Money demand: (Mt Pt ) d = L d(Yt) = 2Yt. In addition, suppose that LO EO LO = 100, M0 = 1000 and K0 is such that the economy is at the steady state. (Note, don't confuse the different notational uses for L.) a. Find the steady state level of kt, yt, ct, it. b. What is KO. c. What is YO. d. What is PO. e. One important part of Milton Friedman's monetarist theory is the rule for money supply growth. This rule requires that the money supply grow at the same rate as GDP. It is argued that if this rule is followed, then long-term inflation can be avoided. To illustrate this result, we now apply Milton Friedman's rule to this example economy. Use the money growth rule to determine M1, the money supply at time 1. Hint1: remember on steady state GDP grows at rate n+g. Hint 2: if X grows at rate y, Xt= X0(1+y) t. f. Show that if this rule is followed, P1 = PO as Friedman predicts. g. Use Friedman's rule to determine M100. h. What will P100 be? The following problem illustrates Milton Friedman's money growth rule which is a center piece of the Monetarist thinking of macroeconomics. Suppose the economy is given by the following: Production Function: Yt= 10 Kt 0.4(Lt Et) 0.6 Consumption Function: Ct = 0.8 Yt Depreciation rate: 8 % (i.e. 8 = 0.08). Population growth: 2% (i.e. n= 0.02). Technological growth: 2 % (i.e. g= 0.02). Money demand: (Mt Pt ) d = L d(Yt) = 2Yt. In addition, suppose that LO EO LO = 100, M0 = 1000 and K0 is such that the economy is at the steady state. (Note, don't confuse the different notational uses for L.) a. Find the steady state level of kt, yt, ct, it. b. What is KO. c. What is YO. d. What is PO. e. One important part of Milton Friedman's monetarist theory is the rule for money supply growth. This rule requires that the money supply grow at the same rate as GDP. It is argued that if this rule is followed, then long-term inflation can be avoided. To illustrate this result, we now apply Milton Friedman's rule to this example economy. Use the money growth rule to determine M1, the money supply at time 1. Hint1: remember on steady state GDP grows at rate n+g. Hint 2: if X grows at rate y, Xt= X0(1+y) t. f. Show that if this rule is followed, P1 = PO as Friedman predicts. g. Use Friedman's rule to determine M100. h. What will P100 be?
Expert Answer:
Answer rating: 100% (QA)
Milton Friedmans Money Growth Rule in a Macroeconomic Model Id be glad to provide a comprehensive response to the prompt incorporating the insights fr... View the full answer
Related Book For
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
Posted Date:
Students also viewed these economics questions
-
QUIZ... Let D be a poset and let f : D D be a monotone function. (i) Give the definition of the least pre-fixed point, fix (f), of f. Show that fix (f) is a fixed point of f. [5 marks] (ii) Show that...
-
1456HHSC attend all (a) In the quantum teleportation protocol, Alice and Bob are every in possession of one qubit of a couple in the joint country00i + statei. Explain how the protocol works. In...
-
Let A, B be sets. Define: (a) the Cartesian product (A B) (b) the set of relations R between A and B (c) the identity relation A on the set A [3 marks] Suppose S, T are relations between A and B, and...
-
By a work sampling study: Observed Data The machine is being used Proportion of manual labour (machine is running and/or (servicing time) T-% machine is random serviced) Allowance Time Proportion of...
-
Financial planners and investment advisors often instruct their clients to hold a broad portfolio of investments to reduce the overall risk. Having a large number of uncorrelated or negatively...
-
You are a team of human resource consultants who have been hired by Carla Caruso, an entrepreneur who has started her own interior decorating business. A highly competent and creative interior...
-
We wish to strip \(\mathrm{SO}_{2}\) from water using pure air at \(20.0^{\circ} \mathrm{C}\). Outlet water contains \(0.0060 \mathrm{~mol} \% \mathrm{SO}_{2}\), and inlet water contains \(0.112...
-
You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and...
-
Moon Software Inc. is planning to issue two types of 20-year, noncallable bonds to raise a total of $4 million, $2 million from each type of bond. First, 2,000 bonds with a 10% semiannual coupon will...
-
Blood plasma proteins of patients with malignant breast tumors differ from proteins of healthy people in their solubility in the presence of various polymers. When the polymers dextran and...
-
What is the correct number sequence, from top to bottom, for listing the following four accounts-- 1. Common Stock; 2 Treasury Stock 3. Preferred Stock; 4. Retained Earnings in the Stockholders...
-
If a = 8.8 mm, b = 7.7 mm, Q = 19 nC, Q = 57 nC, and q = 29 nC in the figure, what is the magnitude of the electric force on q? Round your answer to 1 decimal place. Add your answer a 90- b 600 9 I
-
Calculate the geometric mean return of an investment with five year returns of 10%, (15%), 12%, 8% and (5%).
-
Calculate the final selling price to the nearest cent and markdown percent to the nearest hundredth percent: Original selling price $4,900 First markdown 20% Second markdown 10% Markup 12% Final...
-
Reflective writing on the topic Global Trade and Covid-19 is required. Subject: International Economic Issues.
-
Consider three incomes: $35 000, $65 000, and $130 000. Determine the maximum RRSP contribution and the tax benefit at each income level. What would be an equivalent TFSA contribution? Next project...
-
In the circuit shown in figure, 8. What is the current in the 32 resistor in units of A? 9. What is the resistance R in ft? 4 3 AL 2 A 5 R www $ 30 360 45 A
-
Graph one period of each function. y = 4 cos x
-
Discuss the following statement: We dont want individual plant managers to get involved in the firms tax position. So instead of telling them to discount after-tax cash flows at 10 percent, we just...
-
An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 20 percent of the new wells will be dry holes. Even if a new well strikes oil, there is still...
-
Taxes are a cost, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. The following problem illustrates this. It also illustrates that tax...
-
Do you feel that there are any ethical issues involved when management decides to extend the depreciable life of its long-lived assets in order to increase the firms current net income to a level...
-
Omar Corporation paid \($200,000\) for a tract of land that had an old gas station on it. The gas station was demolished at a cost of \($20,000\) and a new warehouse was constructed on the site at a...
-
During 2016, The Alberta Oil & Gas Company began an exploration project in Montana. The company had paid \($500,000\) for the drilling rights on a tract of 500 acres of land. The company then spent...
Study smarter with the SolutionInn App