What is a productivity shock? Is it a shift in the demand curve or SR supply curve?
Supply curve shock. Some factor of production is effected, which in turn effects supply.
Well I agree with you! HOWEVER i saw this question earlier: "According to the feedback rule with productivity shocks, in order to stabilize the price level the most likely action by the Fed and the resulting effect on real GDP, respectively, are: Fed’s action Effect on real GDP A/ Fed decreases the quantity of money the real GDP declines B/ Fed decreases the quantity of money the real GDP remains constant C/ Fed keeps the quantity of money constant the real GDP declines D/ Fed keeps the quantity of money constant the real GDP remains constant The answer was B. Although I agree with the first part of the answer, I don’t with the second part. For me productivity shocks with rising prices is stagflation, and with a restrictive policy the recession would deepen but inflation will return to its initial level. Answer B considers productivity shock as demand curve shift rather than supply shift. This I dont understand :))
the key to the question is “in order to stabilize the price level”. Draw the curves and see how the Fed can stabilize the price level (meaning make the price level return to what it was) - the only way they can do it is to reduce aggregate demand, giving you B as your answer. If the Fed’s aim was to maintain GDP at it’s potential level, then they will conduct expansionary monetary policy, which increases prices but keeps GDP where it was prior to the shock.
Ok thanks I got it!