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. Real-world economies get hit with lots of shocks to aggregate demand and real shocks. Some shocks clearly fit into the first category, some into the second, and some include a generous mix of both. Let's categorize the following shocks. Only one is a clear case of "both." Steelworkers go on strike, so less steel is produced. Businesses read about the glories of mobile commerce, so demand for high-tech investment purchases increases. U.S. senators read about the glories of the Internet, so demand for high-tech government purchases increases. A series of investment banks like Lehman Brothers and Bear Stearns go bankrupt. Around 2000 , the glories of the Internet fade a bit so innovations increase at a somewhat slower rate for a few years. The U.S. government launches two costly wars almost simultaneously, so government purchases increase dramatically (referring to World War II, of course). The U.S. government launches two costly wars almost simultaneously, using the draft to force many men to work much longer hours and supply more labor than they would otherwise.

Modern Principles of Economics

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Crystal Wang verified

Numerade educator

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?

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