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Show why a permanent rise in the growth of the money supply induces a jump in the price level at the date at which the rise is announced.
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Macroeconomics Assignment 2 Tian Ni Zhang Q3. Show why a permanent rise in the growth of the money supply induces a jump in the price level at the date at which the rise is announced. Answer: Recall the Fisher equation, we knows that the nominal interest rate is given by i = r + ? where r is the real interest rate and ? is the inflation rate. While supposing people expect that ? is constant, we derive the quantity of money growth as Mt = (1+ ?) Mo. Using the money neutrality concept we would know that the price will grow by the same proportion as inflation rate. That is Pt = (1+ ?) Po. Hence we get the left side of Figure 1. The money supply curve and the price curve are parallel with the slope of ?. Suppose that from time T there is a permanent increase in the growth...
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