What is equilibrium level of capital when the money stock

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Assume that fiat money and capital are perfect substitutes as assets and that individ- uals wish to hold the one with a higher rate of return, but that it takes time to adjust capital holdings. In equilibrium individuals hold both assets. The real rate of return on money is \frac{n}{2}, where n=1 and z= \frac{Mt}{Mt-1} . The gross real rate of return on capital is f′ (kt) = \frac{100}{Kt}. (a) What is the equilibrium level of capital when the money stock is constant? What is it when the money stock is doubled in every period? (b) What is the equilibrium nominal rate of return when the money stock is constant? What is it when the money stock is doubled in every period? (c) What are the immediate and long-run effects on capital holdings of an unantici- pated increase in the growth rate of the money stock? (d) What does this model predict for the relationship between inflation and output? Does it matter whether inflation is anticipated or not? (e) How does your answer in part d differ from what the Lucas model predicts?

Reference no: EM131091208

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