Practice with the best case: You are the central banker, and you have to decide how fast the money supply should grow. Your economy gets hit by the following AD shocks and your job is simply to neutralize them: Just push money growth in the opposite direction of the shock.

In all of the cases below, assume that there’s no change whatsoever to the Solow growth rate, and assume that before the shock, you’re at your optimal inflation rate and optimal real growth rate. (Yes, this really is the best case!) These are all shocks, so think of each case study below as preceded by the word,

“Suddenly . . . .” Given the shocks to v

!, velocity, should the central bank react by raising money growth or by cutting money growth?

a. Investors become pessimistic about future profit opportunities.

b. State governments increase spending on schools, prisons, and health care.

c. The federal government passes a national sales tax.

d. The federal government increases military spending.

e. Foreigners buy fewer American-made airplanes and movies.

f. American consumers start buying fewer domestically made Hondas and more imported Hondas.

g. Domestically made computers, cars, and furniture all become much more durable and longer-lasting.  pg65