The solutions I found on the side are not very detailed. Can someone help me wit
ID: 1225490 • Letter: T
Question
The solutions I found on the side are not very detailed. Can someone help me with this question with a bit more depth?
Assume that there are no surprises, with all economic agents and the central bank having full information about shocks that are hitting the economy. Suppose that the central bank adopts a nominal GDP target, and interpret this in the model as a goal of maintaining some constant level of nominal GDP.
(a) Suppose that there is an increase in total factor productivity. What should the central bank do in response, given its goal? What are the effects on aggregate variables? Explain. (b) Now suppose that there is a positive shift in the money demand function. What should the central bank do? Determine the effects on aggregate variables. Explain.
Explanation / Answer
1)
The central bank predicted that there will be economic schocks that might hit the economy,
Then central bank will act to stop recession from coming, So they just keep target gdp growth higher. Central bank has different tools to do this like decreasing intrest rates etc.
a) If Total factor productivity increases then growth will also increase which is good for economy and central bank can allow growth to progress
B) Positive shift is money function might cause inflation, but if growth is very slow inflation is not cause of worry, so it is a positive sign.