Assume that there no surprises, with all economic agents and the central bank having full information about shocks that are hitting the economy. Suppose that the central bank adopts a nominal GDP target, and interpret this model as a goal

1. Suppose that there is an increase in total factor productivity. What should the central bank do in response, given its goal? What are the effects on aggregate variables? Explain.

2. Now, suppose that there is a positive shift in the money demand function. What should the central bank do now? Determine the effects on aggregate variables. Explain.