Money, Income, Inflation and the Acceleration Principle

In this paper we develop a simple dynamic New Keynesian type model using the multiplier – accelerator principle in our effort to determine the time paths of income, actual and expected inflation towards their long – run equilibrium values. Assuming that expectations are adaptive, we determine and solve a second order system of difference equations with constant coefficients. The dynamic properties of the system as well as the parameters that affect the speed of convergence towards the equilibrium are examined and are tested through a simulation procedure. Moreover, we present the simulation results concerning the effects on the equilibrium values of real stock of money, real income and actual and expected inflation, which ensue from the exercise of an expansionary fiscal policy on behalf of government and/or the intervention of Central Bank in money market in order to achieve it’s goal.