This problem asks you to work out in more detail the example of reverse causation described in
Question:
a. Under the assumption that real money demand depends on expected future output, use the classical IS-LM model to find the effects of an increase in expected future output on the current price level. For simplicity, assume that any effects of the increase in expected future output on the labour market or on desired saving and investment are small and can be ignored.
b. Suppose that the Bank of Canada wants to stabilize the current price level. How will the Bank respond to the increase in expected future output? Explain why the Bank's response is an example of reverse causation.
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Related Book For
Macroeconomics
ISBN: 978-0321675606
6th Canadian Edition
Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Ronald D. Kneebone
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