According to the feedback rule with productivity shocks, in order to stablize the price level the most likely action by the Fed and the resulting effect on real GDP, repectively are: Fed’s action, Effect on real GDP a. Decreases quantity of money, declines b. Decreases quantity of money, remains constant c. keeps quantity of money, declines d. keeps quantity of money, remains constant Thanks for the help.
A. When markets are booming and inflation is high, Fed raises interest rates. As a result, the quantity of money drecreases and GDP declines.
I think D. The Fed has to keep the qty of money constant in order to keep the GDP constant.
I’m thinking it is D as well, the Fed wants to stabilize the price level, so keeping the quantity of money constant would be a better option than decreasing quantity (keeping supply and not influencing demand). Once the quantity of money is stable, the GDP should become flat as the inflation and such will not be happening.
productivity shock will shift supply curve to the left and increase price level. A price level focus policy, fed will decrease the quantity of money and GDP will decline to new level but price level will move back to the intial equilibrium.
ssdnola Wrote: ------------------------------------------------------- > productivity shock will shift supply curve to the > left and increase price level. A price level focus > policy, fed will decrease the quantity of money > and GDP will decline to new level but price level > will move back to the intial equilibrium. That is spot on. Ans is A. tough question I think.
It’s pretty straight forward now that I’m reading it on a half nite of rest. Like maratikus said earlier, If the economy is booming and the govt wants to slow it down, it’s obviously going to pull money out of the economy which would lead to a drop in real GDP
JP_RL_CFA Wrote: ------------------------------------------------------- > It’s pretty straight forward now that I’m reading > it on a half nite of rest. > > Like maratikus said earlier, If the economy is > booming and the govt wants to slow it down, it’s > obviously going to pull money out of the economy > which would lead to a drop in real GDP Yeah but the economy isn’t booming - it’s a leftward shift of the LRAS, which is a reduction in real GDP. The reason why the government decreases the quantity of money is because they are price level focused - if the question said that they were GDP level focused then the government would in fact increase the money supply. This causes an increase in price levels but no change in GDP.