Assume that the natural rate of output is 7500 and that the expected inflation rate is zero. In this part assume that the price level is constant . Section A. Analysis of the Implications of Unstable Financial Asset Demands Economists in the Federal Reserve system have argued that in the early 1990s the demand for key financial assets, especially the demand for money, was unstable. They argued that, given the level of interest rates and income, the quantity of money demand was different from that forecasted on the basis of historical data. Explain and illustrate general equilibrium consequences for interest rates and output of an unstable demand for money balances assuming the Fed keeps the supply of nominal balances constant.
Some economists claim that investment demand is unstable.
Investment is the process of adding to the capital stock, e.g. additions to plant and equipment. Explain and illustrate the consequences for general equilibrium interest rates and output of an unstable investment demand assuming the Fed keeps the supply of nominal balances constant . Section C. Analysis of the Optimal Monetary Target Analysts have advocated two basic strategies for the Fed to follow in attempting to steer the economy on a smooth path. One is that the Fed target the money supply and permit interest rates to vary as private demands vary. The second is to select an interest rate target and vary the nominal money supply as needed to achieve the interest rate target.