Monetary Policy: End of Chapter Problem We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock. Sometimes it is better taking tw years to slowly and carefully undo an AD shock rather than shift it back quickly in one year. To illustrate, let's see how things turn out if you take two years rather than one year to react to a negative velocity shock. In this question, your ultimate goal is to get AD back to 5% per year. The potential growth rate is 3% and expected inflation is always 2% per year. Starting point: AD: 1% Inflation + Real Growth Rate SRAS: Inflation Expected Inflation + (Real Growth Rate - Potential Growth Rate) a. Slow approach: Add 2% per year to AD for two years (through some mix of money growth and higher confidence). What will real growth equal each year? Real growth rate at the end of year one: % b. Fast approach: Assume you tried to add 4% to AD in Year 1. However, you mistakenly add 7% instead (through some mix of excess bank lending and irrational exuberance). In the second year, you tried to correct by cutting back by 3%, hut Real growth rate at the start: Real growth rate at the end of year two: Real growth rate at the start:

Monetary Policy: End of Chapter Problem We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock. Sometimes it is better taking tw years to slowly and carefully undo an AD shock rather than shift it back quickly in one year. To illustrate, let's see how things turn out if you take two years rather than one year to react to a negative velocity shock. In this question, your ultimate goal is to get AD back to 5% per year. The potential growth rate is 3% and expected inflation is always 2% per year. Starting point: AD: 1% Inflation + Real Growth Rate SRAS: Inflation Expected Inflation + (Real Growth Rate - Potential Growth Rate) a. Slow approach: Add 2% per year to AD for two years (through some mix of money growth and higher confidence). What will real growth equal each year? Real growth rate at the end of year one: % b. Fast approach: Assume you tried to add 4% to AD in Year 1. However, you mistakenly add 7% instead (through some mix of excess bank lending and irrational exuberance). In the second year, you tried to correct by cutting back by 3%, hut Real growth rate at the start: Real growth rate at the end of year two: Real growth rate at the start:

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Monetary Policy and Equation of Exchange

The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.

Monetary Economics

As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.

Question

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Monetary Policy: End of Chapter Problem
We discussed how hard it is to keep AD stable or put it back "where it belongs" after a shock. Sometimes it is better taking two
years to slowly and carefully undo an AD shock rather than shift it back quickly in one year. To illustrate, let's see how things
turn out if you take two years rather than one year to react to a negative velocity shock.
In this question, your ultimate goal is to get AD back to 5% per year. The potential growth rate is 3% and expected inflation is
always 2% per year. Starting point:
AD: 1% = Inflation + Real Growth Rate
SRAS: Inflation Expected Inflation + (Real Growth Rate - Potential Growth Rate)
a. Slow approach: Add 2% per year to AD for two years
(through some mix of money growth and higher confidence).
What will real growth equal each year?
Real growth rate at the end of year one:
%
b. Fast approach: Assume you tried to add 4% to AD in Year
1. However, you mistakenly add 7% instead (through some
mix of excess bank lending and irrational exuberance). In the
second year, you tried to correct by cutting back by 3%, but
you mistakenly cut back by 4% (through some mix of slower
bank lending and investors' loss of confidence). What will real
growth equal each year?
Real growth rate at the start:
Real growth rate at the end of year two:
Real growth rate at the start:

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