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Market monetarists [the latest expression of monetarism] advocate for a policy of NGDP targeting by which the central bank commits to and then does their

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Market monetarists [the latest expression of monetarism] advocate for a policy of NGDP targeting by which the central bank commits to and then does their best to hit a predetermined level of NGDP. Let's examine this policy in several possible situations. To do this, let's use the equation of exchange in the form MV=PY instead of the percentage-change version. 50 in other words, your graphs should have the price level and output level on the axes, not ination and growth. We can also solve for those levels. Start from a long-run equilibrium where Y=200, V=4 and M=500. 1. What is the equilibrium price level here? What is NGDP? 2. Consider a real shock which causes Y to fall to 150. Assume that velocity doesn't change. What must the central bank do to the money supply if they are following the policy? What will the price level be after this? Show this on a graph. 3. a. Now imagine that velocity falls to 3 due to "animal spirits." First, show what will happen on a graph in the short run if nothing is done. (You can't nd numbers for this.) b. If the central bank follows the policy, what must they do to the money supply? Show this on a graph. {Show the effect of this relative to where you ended up in part a above.) 4. If the central bank follows this policy, would you expect ination {you can interpret this as the price level if want] to be higher during periods of low output (recessions) or high output? Is this policy an automatic stabilizer? Furthermore, does it have the same problem responding to real shocks that scal policy and the more arbitrary version of monetary policy discussed in the book have? Give a brief explanation

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