Consider two policy regimes: One where the FOMC’s instrument is the money supply, and the other...

Consider two policy regimes: One where the FOMC’s instrument is the money supply, and the other when it is the interest rate. Assume that monetary policymakers do not immeidtaely know the shocks that are affecting the economy. In each regime, consider the effect of (a) an adverse demand shock and (b) an increase in risk aversion (an increase in the demand for money). Use IS-LM and IS-MP curves to show how each shock affects the interest rate and GDP in each of the policy regimes. What are the implications if the FOMC sets a money supply target or and interest rate target, and does not change the target in response the shocks.

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Rahul Sunny answered 1 year ago

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