What will the velocity shock do to real growth

Reference no: EM131833217

Question: One argument for giving discretion to central bankers is that sometimes emergencies come along that a simple rule can't solve. Suppose there's a massive, permanent negative shock to velocity. Naturally, if the central bank has discretion, it will immediately respond by boosting money growth. But let's look at the alternative:

a. Suppose that the central bank follows a fixed 3% annual monetary growth rule, as Milton Friedman sometimes recommended. In the short run, what will the velocity shock do to real growth and to inflation?

b. In the long run, what will this velocity shock do to real growth and to inflation?

c. If voters are concerned only about real growth in the long run, will they favor rules, will they favor discretion, or will they be indifferent between the two?

d. If voters are impatient, and concerned only about real growth in the short run, will they favor rules, will they favor discretion, or will they be indifferent between the two?

e. Which kind of voters favor discretion: those with a long-run horizon or those with a short-run horizon?

Reference no: EM131833217

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