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
C i think
no Weird question. Schweser and CFAI text have conflicting answers! #@$%
Is it A? Whatever the Fed does the real GDP will decline. And feedback rule won’t just leave quantity constant. Bad reasoning that proves I don’t know it. damnit. but that’s what I’d choose.
I asked this before and didn’t get a response, so I’ll repost as I still do not get it: This was the question on the effect of a price level feedback rule, that said that there’s a productivity shock and what should the government do? The answer says: “According to the feedback rule, when the price level rises the Fed decreases the quantity of money in order to reduce aggregate demand. As a result, the price level as well as the real GDP would remain constant.” I get that the supply decreases, that prices increase, and that the Fed decreases money supply in order to decrase aggregate demand. However, I don’t get why prices and GDP remain constant. If you look at the chart on Schweser Book 2, Page 189, you can clearly see that for the price level feedback rule, a decrease in aggregate demand causes prices to fall (or go back to the way they were before the supply shock) and GDP to remain the same.
After drawing the graphs, I think, its B for price level. For price level, GDP remains constant at the new level, price declines. For feedback rule based on GDP growth, GDP remains constant at the new level, but at a higher price.
its B Real GDP is not the same as agg demand…
The answer is A P 476 Vol 2: Productivity shock shifts supply curve left - prices rise and GDP declines Feds response - decrease monet suppy -> decrease agg demand -> price level falls and real GDP falls further
Productivity shock i.e. POTENTIAL GDP decreases
I stand corrected :>