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
N°
(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),
M¢
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%
@@
)