The new monetarist (or McCallum) feedback rule: A) adjusts rather slowly to changes in economic growth rates. B) suggests that money supply growth is triggered by changes in aggregate demand. C) is based on the expected velocity of money and the expected growth rate of real GDP. D) sets the money supply growth rate equal to the target inflation rate plus real GDP growth minus velocity. Your answer: D was incorrect. The correct answer was A) adjusts rather slowly to changes in economic growth rates. The new monetarist feedback rule adjusts rather slowly to changes in the business cycle because it is based on longer-term moving averages of the growth rates of real GDP and velocity. Based upon the money supply growth rate equation, the new monetarist feedback rule sets the money supply growth rate equal to the target inflation rate plus the 10-year moving average real GDP growth minus the 4-year moving average velocity growth rate. Therefore, changes in money supply growth are determined by changes in the target inflation rate, changes in the moving average growth rate of real GDP, and changes in the moving average of money supply velocity. I don’t get it. The answer explanation seems to say that both A and D are correct.
McCallum rule is based on MV=PY where Y = real GDP. Therefore, D is incorrect as it talks about adding stuff together
topher, I don’t know if this helps, but here is my crack at it: I saw this question, or similar one, on a CFAI mock exam somewhere. Taylor = Keynsian = adjusts federal funds rate while targeting inflation McCullen = new Monetarist = adjusts the growth rate of the monetary base to target inflation, but BECAUSE THE MONETARIST IS A FEEDBACK RULE, THERE ARE TIME LAGS, MEANING IT TAKES TIME TO GET THE POLICY INTO ACTION, THAT’S WHAT THEY MEAN “ADJUSTS RATHER SLOWLY” My 2 cents, good luck next saturday.
yancey Wrote: ------------------------------------------------------- > topher, I don’t know if this helps, but here is my > crack at it: > > I saw this question, or similar one, on a CFAI > mock exam somewhere. > > Taylor = Keynsian = adjusts federal funds rate > while targeting inflation > > McCullen = new Monetarist = adjusts the growth > rate of the monetary base to target inflation, but > BECAUSE THE MONETARIST IS A FEEDBACK RULE, THERE > ARE TIME LAGS, MEANING IT TAKES TIME TO GET THE > POLICY INTO ACTION, THAT’S WHAT THEY MEAN “ADJUSTS > RATHER SLOWLY” > > My 2 cents, good luck next saturday. I thought the Taylor Rule was a feedback rule?
McCallum is the new monetarist. Target: monetary base Focus: price stability Monetary base growth rate = target inflation+10-year moving average growth of real GDP - 4 year moving average growth of velocity of monetary base Taylor is the new Keynesian. Target: fed funds rate Focus: price stability and GDP Fed Funds rate=target inflation rate+2.5%+0.5*the difference between the actual and target inflation +0.5*difference between real an potential GDP
They both deal with inflation and GDP in their equations, just that McCallum calculates the growth of the monetary base, Taylor calculates the Fed funds rate, they both use real and potential GDP in the equations, and inlation, just in different ways and weights. And I thought I don’t need to know th equation:))
to map1: do we have to know these equations, I mean is it written on an LOS somewhere that we are responsible to know these formulas? I honestly remember last december them asking a question where we had to define monetary growth rate, and I was like, huh?!?!
If it was after me, I would say the heck with this equation! But is not:)
This is just one of those really specific questions. D) sets the money supply growth rate equal to the target inflation rate plus real GDP growth minus velocity. It has to be 10 year moving average GDP growth and 4 year moving average velocity growth rate for D to be the correct answer. So I wouldn’t get too worked up over this question.
i’m with 2x, this is just one of those times where they try to trick you with being so specific. if you replaced A’s answer with “adjusts rapidly…” they would consider D to be the right answer.