Probleme |. In Secon 7. we tated tat Cag’ econometric nite of a xogencty of mi In doing this, You tay (unesitaly) sesame tional formula. was oot adaptive expecations, but instead Tl, = 2. Inigo on alate aa a Which te demand and soph sup bgt + deo. expectations are formed according 10 pf =p. Under what cond ‘Suppose that Cagan had sssumed that expectations were described by = ays tat he expt ale f py has eg tbe ‘aad to dyeamic ab References” "Gunsy Theory of one). Bos Petar heaps nea of ‘ow henaon! Econ Re 8 (een 9) 54 Rational Expectations 8.1 Basie Properties ste conto thse who make thems pepo sens wl to fot ‘pectin ina manner tat elas svoidole res, Fach ‘eran eorons—areavwable:by seeing the prt cond ons that eat rs, agent ca ke seon oe stoma tendeney t rr An atvactve typo for coon sales of ‘Seeger enor, comeaueth tha age a mee ‘nage the as itch 9ay tat ee ney ee vege But how ihe sche of sent itiel ctccortta cnc eae Seger etter egereace pare ‘would avoid errors in the pariclar ce of escrineahsaye some inftion pth ht will make sytem erent from Spe (ee atemstealy in ere) "The mesg ofthe frets tha 0 exes natal the ypohes that agers wold tema expectation errs, me Want not formas but imsead an aonytie conn tht ran out Sach ‘rom Toaze nat the appropite condom et ws emit 3b Sent forming her expcaton Ue tof fny—-net Pio’ op) oe level-an let's denote tat expection y Phe Then tie petra oro tat wil csr when erode opt, Pr Pit And the condom that me went to adopt shat trot Bink blscaotbe senate ented aay formation ome {ith get in prod (bon te expectation was formed) "Toe way to ae ns condition, uns ot fo ase dat expects sabe) eld (bleed) by agents ave equal to {ie mean of be fbaby lon othe arte ing fee, [Been stale tlormaton. For etampl, yy 8 rom the Vaage ft of prod erandors abe een rm tt vintage pan = ‘sf, tbe mathematical expeaation es mena) ol he proba ‘bol denote the 2 ofan sveable ote ape at tine ‘eth esta hype cr sing ca De ged Bly = BP. o In woes, his onion egies he! the abjcve expectation (oe {st pro eb gets ane equal the bee (atest) ‘Hpeciod of py sndnal on (ves the mean othe etal ‘onstonal probity dtoton af seem sfoomationsvalable an Bat where, the cede ay wll sky does te aoa! probatity tition f fos some from? In ier sense. of couse trtnown, But {econonan via washes 0 te this expectations pit othe coment of node barn he coure of carting Thee wnode ops bi own sew of how ps ual senrted. Ths the ony oly bern way fr hf posed 4 ete prod ‘Sompting Etp.2) is model i hs view ofthe actual economy "To inspite segue nvr of av expcaonal bypass that le ou tema tro an hae sere that contin (1) el tdoso Less tow prove atthe aserion ru Fw we cals Feodeit() feted. Tp do that, we td he mean of he dst Hom fos petals That's we compute Ee, ~ le) = Elis ~ Een = Bl) ~ LEP NT = Beer) ~ Elo) = . sowing tat the average errr i 0. Ln ts clean the nt ieky ep the aot one, where the fata ELEC) ‘husk Ely) waned Te vay of at net ich Spec ase ot the tau of rtd expectations" cemoestatd in he append to ths chapter, Thr “laws reo the commonsense dentate er fection ofan expectton that wl be Sued on mre slots Sr carey Se wl py bee agton shen he "Thor me se ht the ere expecitiona or under hypothesis (a) wl bea To complete the Semonsraion tt hee wel be 20 inlet, cenote any vara os aie known tages at. Thus Pian cheno 0, Thon cone the sovarane fp =P and Since Etprs = py) nse ths covarance il be the meant he nsinion of he pede (py =F We eva sco Ele: ~ ra = Ep ~ le 0))8) Elgon) ~ AE ra.) Bt neaase 4 an element of tue that (oO) = Etsiety. fon wang te am of ered expertion “we ae ‘hath term in G}eqube Ep) Tht shows ten hte ° Flos = pada =o o “hime hat he expectation ers aa stati seese, ure ‘Mea any elomen off ie toany vale norman) Tar we five owe hat he spon of ump (wl a fi at "Thm concunioe aocrds mel i might beaded, withthe common sete en ta te “be rea frat ele y andorarable js the mean ofthe probably dscbution ofthat rad ‘rable "The teky sect of cur caren pletion i thatthe ‘clevan bron ie 5 condos! disition-vone tht rele The hyoitesis concerning expectations that we fave outlined was fit pt fr by Jobe Math 0) Beas hep of expcta ‘Sn benaor poste sparen an the absence of seSabe ‘rors acest for otal onthe prof toe agents in he mod ‘ed economy, Math cone the tr radon expects fo dessibe bbe typoteat As it happens, Mats teas were nt inet tory th som con, prt ee pet ‘The protesion's pprestionol te hcory was rest endanced ithe ‘airy anor opting ope Robe na tpled to unportatisser ta masoecnomice, ‘These paper be ‘eb cllecvelyrepaahed in Lacs 0), Watings by Poors 1 Sper (1073) and Robes. Baro (197 were ako portant veloping the meses suppor fatal spetton at xs 182 Application to the Cagan Mod ‘We fave conned that agents wl be forming expectations in 2 ‘a amr hye, saci apaon ec Hstte the use of ths apres by sing amie exp, the (Capi mode! of infistion, unde he espn at expects tt “Themainingredientof the Cagaa modelistbe demandfunctonforreal repeetiey ube yandesrepuramcter, The socasie duran, ‘sasumecto purely random thitis,obe rawninerhperodom =n Unchanging dnbaionwkimeansea advantage Ate do tonisatenchdate urate previon crowing ule fesse foreltn ASaconenen abtevatonforihpeeaton whch nil bese equemly we say toni white mse duran, ‘In(), dp, cons the subject expectation fe a eso of spy thon at twa. To mp trator pte, = Bap), © Ina tap led mony wie Ee Svar tesone aE ft emanates Eien tional openness npeed esse ‘Shosethrootabon owe an waters pee rae o Epes aise ts Ime Bom 9 aEs — D+ a ‘Desig when (8), me mph yo develops oluton orp inthe foletng way Fr the tesa pan be coed To Be m= y+ abBa + (a ° he the ler an be rearranged thu: pn T= po = fa‘One way fo prvced ena ify, 10 update (10) 0 gt an cexpesion fries and then apph Ee yding, Elmas ~ y~ WB te) Ems ~ y= ab ps o [Here Bay) = 0 been is white oo, whe EAE Pr [Epresty the law of erated eapettons | Expemion (i) hen be ‘bitte int C0) and the er verange to eve te fallowing Satstied foe Bp." That would ving i Epos. bat the provess ould agin be repeated Indes, by epesing the prove age Sock ma andthe expectations ofa ature mses Ems Em meena) = 9 (Yims 4 as, Now this tp of slton tothe Cagan made with RE iinsraciv, emphases tht the val of he pc level pe pends oc fee inf future” But tat tat ines tht to determine pte Seabee scp of fee male Toe Schaior af the montary autour, in otbet words The POley For an example of what is mennt by a policy proces, comsider the ‘alte, mand ako on purely ratdom sompoaet The Tar, the component of policy behavior (the systematic part of which i Sears nome nc flies tease Beene? 8 Nes, Eames Bio * wits * fos) in “This ype of eae cn in principe be repeated for enry fre el ty dg pon se i) eee nao ‘thermore, analogous eultions could be cried at if the my Tal peat has pepe ee 83. Solution Procedure When » patil ply proses for bs heen ied, Rowen Iieoutinesftwors a folows By coring) wo (1) he ee co en) Durer rete eaeniats Peer ae ge pone eS See dee ciamaream ana Socaitor determinants. Consequently, sce the mode! ines, we P= ba Ome forsome constants dy s-if wean js ind what they ae. Bait that oajeeure tet piay= by * Bim # Say # So aD ifollows tat Epos = do # dim 8+ Ole ams ta). 8) ‘Now suppose that (17) and (18 ae sbtted ino(19), The rest Yo ald + Aue + Himes +e FL a6 + Oma + daw 4 oe) tH) ‘ever vals of wand eae generated by chance atd whatever Mi pea terre: (9) mat ho b's esate ey perainto theo 2 bun + (1-016. = uy (0 ois + 1-0, cam 14 da aia (= ae = to anu both sides of (19) for my tae. and tate fst what i oeeded, fo they permit 0 sole fr te four unknown ("undetermined seh ‘cleo 8 I para r (2) at (200) we Bat Fatermoe, using (21) we indo (he) and (204) that decoy Lalla 1 ay te tee 0 By pura (21)-28) in (17), hee, ne oan The ate our sought-after soln frp, Tat dsb he Soren ct td dhe edern aem can be epresed A prominent one can he obtained by noting tat bho nome te canbe repaced ym hang p= a ae pall 64 pate #2 Wile 6; an 27 ae vai solos, thy are just erent ways of ‘eine etn 2) forty vas or ng = re patho waac 8.4 Properties of the Solution Leu ov rey conser he maya wh te rk eae ia the preset te way awh pices cgeoe ‘hosts By apcion 0 (5) ay nha © pseu das fice wile <0 owe pte fo wha it Would Sa beethe vale of u ad Been 20. That ection of fe i ete ka ‘ping ih atone posite represents herbal leslof money demand crustanstat naturally Ia 02 gh sic mony tees of gona elo pee ‘Sinica suping tt 9 pov sertes—ether things equ increase. py fore 0 feposnis higheehun-ormal toney soppy I mi be mde, however, hat the apne a he {eet tp ew than one for on, and therefore is hah ‘roprtonate items of he ro arses ad, Spel, Fe netoent one (25) (8), oF @7) 6 1/= a ™ ) and ‘ih fl © 105 ee woud oral presome toe the cbse, eho wl be sey prener han 10 Tan the eect ot one for one may som to rect stature ofthe" uaiyheor” pop ‘yt bl, ta the proper of prceievel responses Beng pe Fronatetomoney tock shang Halt sainvetatsenster mote ‘eal efreconcaingthahepranent node cons th quant theory propontons “Kran pin isinvestigation, ote thal he postulated are of tnemoney ply poss such hat ieee of poner dsb ‘co the monty tok el is on temporry. That hs sca De Stony eaamnnton of th expesane form genio footnote 7 IReened pone unin m be one per Bat mye tbe ket oly ut wth tee values ging salt ha smalr as aped imei renter Ts the ple “experimen {Testo sate same sti he eu quan heey compa ‘ase later pcyasumes a permanent change inthe Roney “To fous on semathing closet the wsul comparison, hee ae two says to posed One ef comers aronces to that re [ovine THs csc may be bane Uy eting yi them proces ‘Shun 0 Tasme tore makes the ect on, pemanent spose sh = baad winches me Then ch ccm efor one and remain fal) resi othe nal conn for msc fee wore never ay moe turbance the aes of mcr ey at 000, wool a fly rede fhe shock te And ‘Thc a2 tgaton (shows tap does at rexpond on oe Tie scamd way to represent a pemanent change to conse bow sig tyeem woud be erent yin (4) mere changed. Supp, or example, that wat oe unt higher than ina ference case Then the rege afr of m would be U0) ai ihe, a faa Be sen ftom tc exprenion i oon 7- Now a (27) we can Fd that {hs cae ne eveage value ofp, would be gree bythe flowing me =m) y= wd ~ Med my) = alt= mht =) an “Thus a change inthe aera veo m, docs. in fac, at x ono mack opts RE voson of he Cass model. Inte wee stn the got posed prope towed tht te del doe Feet guannsicry prove. ison of iain atin ‘famouse nd wh tent experts ees a {ENetycarctl when pong qorsons sou te gid of ec of opaou on endogenous cbbi, 85 Examples of Rational Expectation Solutions [As the main purpose ofthe prsea chap to learn about RE ‘Balj et ut aw conser sme espe ter than the Cogan ‘Model "These ctrl wil beso simple ato be wihot obvious, ‘ono menting th bjte bingo make he rer! ccs om ms deaty posible ra se a on sine mendes ty mens ofa nl that somewhat ke the Caan meds But pred ems vr yh ovo presume I= 06+ Eins + >) were white noe, Then the relevent dtemlous fy edad ‘nly ind ont we conjecture that the ston ofthe form yin dot eoTo find and fy, we note ht if (3) se, then Ey, = by. 0 ‘ton int (2) Side 4. die = 00+ ed +a on (Pha Shove te sta wept hil ey where white nose. Tha i, is Border autoregressive di tarbons, Now ints cive wean thnk of wr anders the See ot es = os eo = 4 + Sains + 6) Swbntuing(3)-(5) int (29) then lls B07 dts + b= ay lds + Betis + ES es > ‘The imped conitons onthe + ate y= ap +e 44 = de on wing (9), A third example retin te atoreprenive diterbance (23) but Ey bt Bythe va oy pi on pr ai, Ts plus (5: Apsin we concur olin of fm (3), 400 B19, Rove Foust t tas 5B = 0. Ping (3) (3) ad) to (8) kt Ses + dab = ay + Oy + dite) + as + By CAD hihi he condos =o +a dh =a +o A ait @ 8.6 Nodels with Lagged Variables ‘four example gone that pens at fist lance to esse ‘ree of Set BS, but ween tre Of ioe a Rew pe ide wit ni, whih ke (29) excep tat he previous psoas ruc othe coopers ait ded the uation, Beene ‘ols appearance im). 9 mt certainly be sade 1 he it of fetnat determinants, Aicrdngy, we now conjure 2 ton Of the tone vin bet Oat a 5 + Obs > days > bd here (has been wed or Ping (28) ana (4) no (5) ye 0 ites + ba = e+ lds + lA + Ie + Haso thi mpi he condons b= wt abt abi “Tae new fica in hs erample shows up ce i he sesond of these conan atk a genic equation n'y Tho tis imped a coe) Seth as th ft mo at apo the present model Teds tothe same moe a he at Ex fe GrSeaoe #3, for whch needy tow it fltn foo Wl enl in: Bat wih oe, sa (8) Bes we Sac a ya“ dn 0 then ey =O, nhereas the tecond tin that dy 9s hay es Fe ea whca Sout tee wee nine tie gee TOO ppp. We be fond ie ‘rn (bape by se seh tem phe amet ve sad Wa ob cones saps ee ned trithappets be pe tay cee i cape quety acs Vin land ude lagged enogons ee ines Fone b hypen hthespprear fa acm Pel il ston aye eae aa o Sede wc oe cia vale sooo ote yas in) wl be spre Is for the mol at han, That he analyst coniirs a petal eae Gf moa for whch alfa operating He fad Suton the sandrl per of Soon He en cones the 8.7 Multiple Solutions ‘Unfors be reported ht some economists do ot agree ‘ithe appescnrecommened in Sexton instead they ro The tlzton of oso forms that ine larger number of eter nsx erm, are et of "tte vanabis” This step TE hem oi nov age i, ora ste, father pecan bavi of the mosels endogenous "bles, fe Ietig to pre explosion Ty hate eles of ning esr” determin or sate varbls nthe ops sauton, nner the flomng example Teena of te Cagan model ne case a ich (ol for np) the money stocks held sosuant overtime fe y=). Te te dl can be wrens rosea mould gg hate snus the form Pr 6+ bite @ ‘which implies tht Eis =. Patig these into (9) get eX + ou) +m ND men yt aby ett i Head ote slain fore ~ This pees, sitsboukt wth (25). But we try slain othe fom P= ba i+ dare * Poe ey ren though ps anda do a0 appear in (45), we weal tat Sabon of (8) ane (Sit 4) then esti m= 9 aldo Bide * On * ban * bes) + bt C1 ada dae BaP + dats) + He bv) + be 60 hich ves et thecondons 0 = apids + ay = 2)8 + “ 0 = 968+ (1- a 0 = absds + (1-0), Nove ofthes mpi that aus 20 or (a ~ fates Thotens the procedure of Secon woul apes the Slatondeserted in ($2) wil be tained, But if instead the value = (a H)/as ne, cw peculiar, Ft ping tat ‘hue mo he fourth of Sonos (8) bet 0~ of Jo, 4 a ae SE chet a ee to SET ose sine scgeenaeet amram eee ‘Appendix: Mathematical Expectation—A Review The objet inthis appendix i to prvi a brief and notecni Fevew of some basi concepts ebay theory tae eur ‘ilsedin Chapter fad elewbee athe bk. The disunity Study a he materia z Le denote indo var, tai, vaible perssing to some stl or sancepaal experimen whe outcome I random = ‘crermind (atleast in pat by chance The pone Outcomes ae ‘presented by specie numer vs rf gr- inthe dete ase oy al ales x within some tral (only rom 8104 {he conuogs ease The proba ot he erent pose ts ‘Dime a given ya ditto eominaous denny fncon fl). Let ‘if cnder te natre of nthe Otte ease, ao. ce te eonep of mathemati expectation, Nfore tang te Sepp th decent fe ae f ‘Ey tein species vale (2) that te roti of ac Fence ofthat vale: f(z) ~ Pros =u For each number sce Boa hsp orem ot) = eae ‘hited te Thar the pronoiiydantuon for in hs detec {Site case aly horace bythe density Sain (Toe ‘Sime monde tre, frthemove if here were Soule iy of pose rales ssn Not hte te wing uppers ees ame random vrai and tomeres eters lt eset ‘Satimay be resize, Probatities ze by design analogs 1 relative feguense. Conte gram an nay scenes us ha a Grand the prosaites ofa pose utsones sum 18 Toe ety oi therfore has he properes/s) =O ad f(s) = for all x and ako. f(y) = 1. Furthermore, nce f(s) = 0 for vatves exept sy. / ry, the tind property cn be writen Epte) =i, hee be spaced summa sadersoo i apeig te all values fom “=o o= Tht tons! coven il Ud eee) la wha foowe TX iss zee tandos wi denaty fs, then the mean of he {sutn of the peobayneghed erage pen by he sm Biss which canals be dent Ef). On the yb Slused to denote the mean of X m= ath ay ‘This concep is etitely analogous, wile observed, the simple meus a's Zecom of munis Js) = wewed sth action al mbes of the cllcton tha hate vues Ths the mean of Fandom rable Xs ease af eco tendeney of po ‘iy tation, jem the mean ot cleson of nmbes Imes of hice eases (x “verge. “Aso oeeat porate a mesure ofthe “pres.” or “Sper sic of te peo dion 9 known 2s rane Uflet of denote the vvance of Xi i tine in the rte case by ~ ma. a Amin, thre comrespondece withthe vance of slletion of ‘nie for sae prose ut ost of eve ok = Here there are five posible outcomes, 01,23 and 4 wid oid Probables a shown, Fora sabes exept thee Be Prob LX = 2) Bite. Note tat Sa) Di Poa eon G1 FOL = 10. Wie Thaprohliy dbo, he rand varia Xs meas ale a pee won) 2 (04) #203) e000) eb) 17 Kevasance oa (0 LIAM) + G~-17"04) + = 17a) += 19) Gan ea TRIG) Salsa te edad deo therefore ‘Now consider the ain whith Xi conan random vache Again here dei function) tat Sree probable pet Iya rea poss ale foro the prot of sn) stle parler valve pero: But the probity of assume some value nthe neha Betecn e and befor example, sane otamad by Probe < X<0)= [sada a ie anon oh ct cn, sie ttn an OSES Ve we have [Jaa = Here ad in wha foliows, ‘ry integration sgh hou esi sated mt shoud be unde. ‘Mond denoting negation ver lacs ors fo 4 detced ae aie [a -noitnde. as) “Tus the concepts ae enti analogo oe diet ase the only ‘Tirecs beg that ern takes the pace of suraton. Fora single cami oft soins random vara suppose that an ont acu the eral aes between a 3 08 {hat he Sane’ ncrence ie ny smaller tral within hat Span Ulgend only oni eng (Tho for exami te probably of SEES LE the sae m3 5 453) Than the dens fe onnowihi le) 02rd = swt) — Deveb (e pew [lo2ede = 022 |= ones - 0 =25. ‘Tohru he ee so ey ati rample the snd devon of X14 Me re ow prepared to defo he mst pst covep of hs rev That conapt the maa eapecaion of ra) ‘Bemenn of he Ssnuton oe undom variable: continua ‘andor vars, then fe matemated expectation EX) equals Tipe ee uc here a enc nrc tenet or feats feetaleain tab extremely eal. Suppose 8 ‘iets ov etnias randoseable ih deasty 7s) Ten Ist SER) te fenton that pan so the various pole oucomes ‘Pesan dts anew (eats) random vale 61). 1 would Se pole to determine ts denny incon and fom ithe mean of {SGD}, Bet we can srt that paces y tg he lowing SEOs! epruion of AX) 8 dented EO aoc) [ecaven ae weA{9(x)) = Locate) wn the dates cage. Ths the material expectation of $(X) is Simply the rotate verge of 3X) somputed Tela fo The ‘ent ancton for Xt ena othe seat ofthe dita of ‘he mpd random arable 9), bts be detcrmined without Set ‘pty desiag the deny anc forte random arable sl ‘The utflns of he ont of taenateal exportation a ened in (AS) and (AT) tems fom the Rei and gery proved by the fn 00), and so fom a fae of camaerale nut Sonvenience: many formulas epesed in tea ofthe “expeiton perio E() are pecly the ame for cet ond atau ‘andom vanbles, Whenever wing mar ormaan, consequent there rerio my tetova Fuca > ‘Thon salmon immediatly sppatem fom (A6) (A) tha me have EGO "ty and E[(E~ ng) = of. neon Xs dee oF ‘Sotinuous, The frst of thaw sec aes shows ley that he athena expan tip an of tema ey There ae lew cations lng expected wales hat ae 9 ‘tthess te feos Let Xb any random arbi nih mean ECT) Teco and be arbi) comstanaand let 4y@X) and 9s) 96 Funions with means E( gu) and £19,081). Then Ha) =e, as Fe + eX) = 6+ a0, as 8)) = 61] + OED) aN ‘These flatonships are strigtorward implications ofthe linearity properties of smmation and inertionapestons, Thurs prt of (AIO) ore continuous cave ra lows atc0 + 06400 = [atte = tsaynee =a i stnftedde + 6 | erenae outa at a, he py oa i nu ith sana ‘es (AO) and odo not eae separ rae PY ‘Athi we need o extend the dae of expected values ‘malvorige eight oe nbc the expert ot has ‘het wor more jt ditrbted anor arabes, For np I nr tes Ne aus hn a a Ye ty ess ee Se Sorsbls whose outcomes rej detemina'ty se Mme, ‘aperinrt. Te prc of sieent ae ate deseaed bye ‘eesy 7) Taine rete cs he evan pcan Pro = rand ¥ = 9) au Pobia =X bande eat = ['[" sy) dedy. cata) both cnet fs.) = 0 Tost he mur of bivante dbase wet com ere mp nhs came ey te $e proboties othe vars bate onteomes ata ne (he long talon Probl = =1 and ¥ = 2} ~ 010 whe Probe = ‘and Y= ='0.39 een easy be vere ht he pos a soni: 3B flay) =Note how these values are obtained: (0) is found, fo oh, by sg exert at Sma 10) oy ‘generally, so we have the formulas “ 10) > Zfto, as 10) = fs). aw The resting snivarne deny fain (andy) ae feed 0 (Gaal orumconiona taivanote probaly sibon tt se. sinuous case, Suppone that X and Y are jin citbuted continuous fandom varie of Bavote desi fg), Teens tegration [eth counterpart of umtos or do), the fouls or ane INe arial dense for ¥ and Yar aso 100) [rena ais fo) = [ptanres. (ale) Fontemor, for summation ovr oth vates 40 tine gece Mit ae ontsingin se neo msi) te Inked besten wed lsd Stacy of hen) rete) mtn Ao We ca ar tse) sad) fo ne Netra tee ane ocr eis af ta "Sciam cine teste adn Fees ind rh ths psa cman by is rh {ici he mula deny Yen lance ple by Je) 7 aed) ha flows we shal forthe sake Stine lt egy en” Se dt en ype of ésibton cant ited sansa dcet cumple ed fecal Supe tat for cramp the aay emer ih Teron sont Xp hen evo} Th thera risa sed cot dey i yl) shoe est tate poms fore i, = wa eine mimerl cane propertonlo e enes i006, an039 bathe somber mt to she et Goals bse hus ne ss oO ex of nem By 08 entice rae fy) ‘Tas eps te contin ey. 3). ow 2 pala Now: forthe sae at hand. the sveitons dens fa) bppeas 0 ‘Sind win fy Tat ennsence, However, aout Which more sabe sad ltr ret oe epg came gs a ter {Syeng) by mayo he ormen fe) fei) an) Ses) 6 sai 2 Indeed the sugeston is warate, prvi tat (ys nonzero in (Gt) anja) sonzro in (Ai) © Farhermoe, tee foul se "At happens he paresse mera! example sed above Ds sstethe import sone proabii ndpnd Te ea SSepemnt of nafected by) the vale of theater varie Ina amerel examples sndcedthe cst onion potas ‘mp, uly be veri tha esto fe} cx te Sines thot tbat above for 13) And tht samenessth cer co dni, The By ad en ff) Rf Ba se a) 3 dn cc ne a ee are tar onal ete TPAC ley Sic te tal bee ih fey ates Sy Sage ake fain sts HON = EE eens. ay) inthe tte ese ad at Univavate costes, the mean ofan implied random variable. Evident ge Suppone, aa pei cate, hte take le) =X tnd ue (ASN) 0 Ie wil te reated, however, tht pole obtain a uncon hopa unrated or Xt mart Ses by means of eo tion (AS). re et) debe ts deste have 140y= [feane a Then sine a unvait dent fr te random vartleX, me can 1x = [ste ae. sy tet de ~ {x {p00 ae» [artsy de [o[reneree ih feito (A0) he ean the mug Sato Simiary, £1) ean be foun from {AS ore te meas ty) “Tae mihematal expectations AUX) sad EV) we aeons expected vats For sme purpose, bonever he anane a oe ‘oncerel wih expectation cond upon soe cceoee et ‘ith expen reatte to some condor dstibaen tte nai means of ths type fly an portant lef jonc ovomic anus with ftom expectation et us dente te ag ‘tional expectation of X pen ye FU) snd smry dente te sondion expectation oY gens as Evin Ser thee topes {ots ee eas of condom drbton hey ay eB xi ~ [tein 0) es eco Sus ceoue been eat of ic ites tat cantonal dtr Spend on gh ea se indepen wll ue om tor ane vatote ee sie Wheneer ¥ and Y $0899 = Have, 26) ‘ee note hat our numerical example fa aie snion tase Popery ct independence. Cate which stats aspen Di re owerer,eacepuomse Moe pial. Joly sheared{batons i) for exe meee tte sng WX.Y) = B= EN EN ay ‘ea whe sy dd by ad aye anda evs ot ihe marginal GStibtons of ¥ abd) “Te prnsiplatracions ofthe comelaton mess ae tha ti Fes hot al canes es tefvecn “I tnd of ia alu. Bot the ‘Svaane and eorlatonmeaufes of sacton edule, 36 one Stal hopes for random variables tt re Ingepeet This Gat ‘Sows vey tor detiuon (AS) aad the propery (419) sry» EUG ~ EXYY EV) EIXY ~ BY ~ VEX + (EXXEY)) ae = EQXY) ~ EMEY) ~ EVEN) + (EXE, EQNELY) ~ EXEY) = 0 weet Hilo tha J) = ee {enconitoal) mean ofthe conditional mean of? ven X. which “Tee he mea af thai {frome -[fjrowe)onee But f9f(y8)4y ie ot a fnetion of, 0 the ast expresion above can evwrten [oo Then, since Jft.y)4y =f). we hve {[ fovea ee ffir [ftearara “fife foone tin, il ofthe fvepng sul Be sede by nerpeting the dens [Enchnse dacee probably (ss) fncins sein mations ‘ator than nega Im haste the prt ould be =3[pci9] ze} -3[EyoWfio- 3 ESB THe B [ze 0) = 50)Problems notes example of he 1p consered i Scion 8.5 wes eg fon 09), than apeted by (i), ead in hs vamp, ub the moving. m= 6 Ob whee & 8 wile mise Finda ston for J thi case, {Consider again he market deste Prior 3 of Chapter? bat ‘nw ssuime that expectations te formed atonal tha Bp Here Eprm with cng ates. | Detve soon frp Sed ten geet oot wats bpty —b>0 he demand deems not only he current rice, metas 00 he pce radonlly expected to prov ie bea Tate Here 0, < anda; > Owhle and ae white-poie dtr, Sippore tht aooey demand nan economy is haracesize by the Cam demand focton (with swine. Cages snon ‘eating money ply tchviot doesnot pve, however, fe ‘Sead the cota bank creates money scoring the raton m= Bo + Bape wih, white noise. Show ta in he ete te soloion posed ithich of the two coresponds to the solution recommended in ‘equations (1) abd (2) of Chapter 10 Suppse the economy fs purely ‘Misc s that, = Then hee equavon aa be conde 2 18 REF Epos 7) +m For spy, delete, Then amar th he monetary authority mare white nes i he solo fo p.and References BM" a