In which cases should Federal Reserve change money growth

Reference no: EM131833215

Question: Milton Friedman famously said that changes in money growth affect the economy with "long and variable lags." That means that if the government increases growth in the monetary base this month, the money multiplier takes a few months to turn this into growth in checking and savings deposits, and it takes a few months more before businesses and consumers actually spend this money to purchase goods and services. Let's see how this changes our views of the previous question. In each case from the previous question, the Fed predicts how long the velocity shock itself will last: We call this "shock duration" in the next table. After that time, velocity growth will go back to its old level. Additionally, in each case, the Fed's staff of PhD economists estimates how many months it will take for a change in money supply to actually push AD in the desired direction: This is the "monetary lag." The question is quite simple: If monetary lags are shorter than the shock duration-if the Fed has "fair warning"-then a shift in AD will be stabilizing. If not, then a shift in AD will be like mailing a birthday card to your mother the day before her birthday: possibly destabilizing. So, in which of these cases should the Federal Reserve change money growth?

Reference no: EM131833215

Questions Cloud

How does change the Fed response to economic shocks : If velocity does tend to move in the direction of money growth, how does this change the Fed's response to economic shocks: Should it take bigger moves.

Determining the effect of both inflation and real growth : We saw that real shocks and AD shocks often occur simultaneously. When this happens, unless we know the exact size of each shock.

What will the velocity shock do to real growth : One argument for giving discretion to central bankers is that sometimes emergencies come along that a simple rule can't solve.

How fast the money supply should grow : Practice with the best case: You are the central banker, and you have to decide how fast the money supply should grow. Your economy gets hit by the following.

In which cases should Federal Reserve change money growth : Milton Friedman famously said that changes in money growth affect the economy with "long and variable lags." That means that if the government increases growth.

What was the growth of velocity between the two years : We explained how a central bank has an important role in maintaining confidence: "High confidence" keeps velocity growth and the money multiplier from falling.

Summarize literature review : Research Questions/Hypothesis - Research questions should be linked to Literature Problems, Gaps, and Hypothesis. Need to summarize literature review

What did Burns do to AD in the given year : In the early 1970s, the economy was hit with some negative potential growth shocks, the most famous of which were the massive oil price increases caused.

What is the best policy for keeping AD as stable as possible : If velocity shocks are common, what's the best policy for keeping AD as stable as possible: fixed money growth, nominal GDP targeting? Or are both equivalent?

User Account

All Pages