The question is quite simple if monetary lags are shorter...

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?

Transcript

00:01 So in this question, it says milton friedman famously said changes in money growth affect the economy with long and variable lags it means if the government increases growth at the monetary base this month the money multiplier takes a few months to turn this into growth into checking and savings deposits and it takes a few months more before businesses and consumers actually spend the money the fed predicts how long the velocity shock will last shock duration is a term given to this then in each case the fed staff estimates how many months it will take for a change in money supply to push aggregate demand in desired direction called monetary lag so the shock duration is the velocity shock so we can think of that as the impact of the growth in the monetary base so basically what happens due to the monetary policy and the months it takes for a change of money supply to actually change aggregate demand is monetary lag if monetary lags are shorter than the shock duration the fed has fair warning a shift in aggregate demand will be stabilizing so if the time it takes for the change of money supply to change aggregate demand is less than the shock duration or basically the velocity of the impact of monetary policy then aggregate demand is stabilizing a change in aggregate demand is stabilizing? so if not, it could be destabilizing in which of the following cases should federal reserve change? money growth so we're given a few cases we have a shock duration and monetary lag and to further elaborate on what velocity of money means it measures the number of times the average unit of currency is used to purchase goods and services within a given time period it relates the size of economic activity to a given money supply so then let's go on to the table provided so here's the data for the table.

06:30 So then given this data if monetary policy is less than shock duration then aggregate demand will be stabilizing so we look at the monetary lag so this should be monetary lag if it's less than shock duration, let's go ahead and just underline it...

Question

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