Explain the dilemma that supply shocks pose when the Fed chooses to use monetary policy to achieve its goals
What will be an ideal response?
A negative supply shock causes the Phillips curve to shift up as the inflation rate increases for every value of the output gap. If the Fed keeps the real interest rate unchanged, the inflation rate will rise, undermining the Fed's goal of price stability. The Fed could attempt to maintain the inflation rate at its initial level by raising the real interest rate, but the higher interest rate would result in declines in consumption, investment, and net exports, decreasing real GDP below potential GDP, and so fails to meet its goal of high employment. Therefore, supply shocks require the Fed to choose between its goals of price stability and high employment.
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The major criticism of real business cycle models is
A) positive technology shocks actually push real GDP above the economy's potential GDP. B) this model relies too heavily on monetary explanations for fluctuations in real GDP. C) negative technology shocks actually push real GDP below the economy's potential GDP D) negative technology shocks are uncommon and can't explain all business cycle fluctuations.
Assume that a security has equally possible outcomes of yielding 8 percent and 4 percent. The standard deviation of the probability distribution of returns for this security is
A) 6 percent. B) 4 percent. C) 3 percent. D) 2 percent.