11:14 AM Tue 24 Oct TUTORIAL 9 - MONEY IN RBC MODEL Problem 1: Macroeconomic Effects of a Lockdown See Figure 1. The decrease in (shown in red) leads to a leftward shiftin Y°. Assuming that the drop in Y is larger, the equilibrium interest rate decreases. For that reason, N* shifts further to the left, as shown in green. Hence, in this model with flexible prices, w increases. Output drops after the lockdown. In principle, the effect on M is ambiguous because both output and the interest rate drop. Assuming that M is relatively more sensitive to changes in Y (as we did in class), decreases, so P increases in equilibrium. Composition of output: By assumption, C drops. I increases because r goes down. G is exoge- nous and does not change. Note: Why the lockdown does not affect labour demand N"? There hasn't been a technological change due to the pandemic, so we would not expect a change in labour demand, in principle. In any case, there is some ongoing discussions on how to best model a lockdown. Here we are taking the stand that the effect on N* is more important, and we are abstracting from the effect on N4 for simplicity. Problem 2: Money Velocity 1. In equilibrium, M; = Mfi So using the expression for money demand into the quantity equation, we get P,Y,rr_fiVt = P(Yt, Vi=—rP, oY) 1 a 2. By equation (1), money velocity is increasing in level of the interest rate r,. This is intu- itive. Money velocity essentially meusures the number of times the a unit of money is = 60% @@ )
Uploaded by MagistrateTitaniumHedgehog18 on coursehero.com