unexpected reduction in money supply growth rate

CFA Level I
#1

I believe there was a huge discuss on this. couldn’t remember exactly the final conclusion. But I found this question very illuminating. just to share with you. Consider an economy at full employment but with relatively high inflation. Assume the central bank unexpectedly reduces money supply growth. The unexpected reduction in money supply growth is most likely to have which of the following effects on the inflation rate and output level in the short run? Inflation rate / Output A) Remains higher than the desired rate /Remains equal to the desired level B) Drops to the desired rate /Drops below the desired level C) Remains higher than the desired rate/ Drops below the desired level D) Drops to the desired rate/ Remains equal to the desired level

#2

B

#3

b for me.

#4

For unexpected, C. For expected, D. I believe both CFAI and Schwerser covered this well.

#5

C

#6

C is the correct answer. The reason is that AD shifts out less than it would have without action against inflation having been taken, but then SAS shifts left by the same amount as it would have with no action against inflation having been taken (since the action was not anticipated). In short, SAS overcompensates, shifting left more than AD shifted right. The result is prices higher than they would have been if SAS had shifted left by the same amount as AD shifted right, and lower output.

#7

nm

#8

It is not restrictive. I think we made the same mistkae

#9

yeah, i need to read more carefully.

#10

Consider an economy operating at full employment, but with a high inflation rate. Based on the long-run Phillips curve, a well anticipated decrease in the growth of the money supply is likely to result in the following changes in the unemployment rate and inflation: Unemployment rate Inflation rate A) Increase Falls to the desired rate B) Increase Remains above the desired rate C) Remains unchanged Falls to the desired rate D) Remains unchanged Remains above the desired rate Answer C Consider an economy operating at full employment, but with a high inflation rate. Based on the short-run Phillips curve, an unexpected decrease in money supply growth is likely to result in the following changes in the unemployment rate and inflation rate: Unemployment rate Inflation rate A) Increase Remain above the desired rate B) Increase Fall to the desired rate C) Remain unchanged Remain above the desired rate D) Remain unchanged Fall to the desired rate Answer A

#11

SanyaizSanDiego: seems like we are browsing Q-bank on the same topic at the same time. hehe. good luck guys.

#12

nm