Monetary Policy: End of Chapter Problem Milton Friedman and Anna Schwartz argued in their Monetary History of the United States that money growth and velocity usually shift in the same direction. Thus, higher growth causes optimism and slower growth causes pessimism. They believed that velocity had its own shocks as well. a. Let's run through some examples of how this might work, in a setting where the Fed wants to keep AD growth stable at 10%. To keep things simple, we will assume that the Fed can control money growth perfectly. We will also assume that a 1% change in money growth causes a 0.5% shock to velocity growth in the same direction. Using these assumptions, fill in the missing values for the following table. For each case: AD = Initial Velocity Shock + Money Growth + Velocity Shock Caused by Money Growth Round your answer to the nearest hundredth. Year 2 money growth: Year 3 money growth: 15 Incorrect 8 Incorrect % Year Velocity Shock ****** 4% 3% 16% 8% 4% 0% Year 2 velocity shock: Year 3 velocity shock: Money Growth Incorrect 16 incorrect of Velocity Shock Caused by Money Growth 4% ×0.5-2% %

Monetary Policy: End of Chapter Problem Milton Friedman and Anna Schwartz argued in their Monetary History of the United States that money growth and velocity usually shift in the same direction. Thus, higher growth causes optimism and slower growth causes pessimism. They believed that velocity had its own shocks as well. a. Let's run through some examples of how this might work, in a setting where the Fed wants to keep AD growth stable at 10%. To keep things simple, we will assume that the Fed can control money growth perfectly. We will also assume that a 1% change in money growth causes a 0.5% shock to velocity growth in the same direction. Using these assumptions, fill in the missing values for the following table. For each case: AD = Initial Velocity Shock + Money Growth + Velocity Shock Caused by Money Growth Round your answer to the nearest hundredth. Year 2 money growth: Year 3 money growth: 15 Incorrect 8 Incorrect % Year Velocity Shock ****** 4% 3% 16% 8% 4% 0% Year 2 velocity shock: Year 3 velocity shock: Money Growth Incorrect 16 incorrect of Velocity Shock Caused by Money Growth 4% ×0.5-2% %

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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