What happens to the price level, P, and the interest rate, i?

What happens to the price level, P, and the interest rate, i?

Suppose that the government replaces the existing monetary unit with a new one. For example, Canada might shift from the old dollar to the Harper dollar, defined to equal 10 old dollars. People would be able to exchange their old currency for the new currency at the ratio of 10 to 1. Also, any contracts that were written in terms of old dollars are reinterpreted in Harper dollars at the ratio 10 to 1.

a. What happens to the price level, P, and the interest rate, i?
b. What happens to real GDP, Y , consumption, C, and labor, L?

c. Do the results exhibit the neutrality of money?


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