Problem
Consider the following dynamic AD-AS model: yt = θ(mt - pt), θ > 0; (Aggregate demand behavior) πt = π e t + 1 β (yt - yn), β > 0; (Aggregate Supply Behavior) π e t = πt-1 (static Expectation)
• Let µ0 = ?mt be the growth rate of money supply. Derive the system of difference equations in terms of ?πt and ?yt .
• Find a steady state, and Draw the phase diagram.
• Suppose that central bank increases growth rate of money supply to µ1.
Explain the dynamic and steady state effects of monetary.