1.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 cases below should the Federal Reserve change money growth?

Case a.

b.

c.

d.

e.

f.

g.

Monetary Lag

(months)

14 18 20 12 16 10 18 Shock Duration

(months)

8 12 Permanent 24 9

Permanent Permanent Shift in Money Growth: Stabilizing or Destabilizing?