rowing integration on the real side of the global economy is similarly complex. Though trade ministers sign all types of bilateral and mini-lateral trade agreements, and global trade flows are going gangbusters, multilateral and major regional trade negotiations are going bust. Although polarization has grown on trade, there is growing convergence on the critical importance of global development. While the U.S. public has rallied around grassroots efforts to raise spending on HIV/AIDS and provide debt relief, U.S. military and foreign policy circles have come to recognize the fight against global poverty as a fight of necessitynot only because personal morality demands it but also because U.S. national security does as well. These two converging strands have helped provide the biggest boost to U.S. foreign assistance in decades, along with a proliferation of uncoordinated institutional arrangements to administer it. In the next few years, every one of these challenges will be further complicated by the belated and patchwork attempts to mitigate and adapt to a changing global climate. A fundamental transformation of the world's economic paradigm away from the carbon foundations of the past nearly two centuries will require vast global flows of technology and capital.rowing integration on the real side of the global economy is similarly complex. Though trade ministers sign all types of bilateral and mini-lateral trade agreements, and global trade flows are going gangbusters, multilateral and major regional trade negotiations are going bust. Although polarization has grown on trade, there is growing convergence on the critical importance of global development. While the U.S. public has rallied around grassroots efforts to raise spending on HIV/AIDS and provide debt relief, U.S. military and foreign policy circles have come to recognize the fight against global poverty as a fight of necessitynot only because personal morality demands it but also because U.S. national security does as well. These two converging strands have helped provide the biggest boost to U.S. foreign assistance in decades, along with a proliferation of uncoordinated institutional arrangements to administer it. In the next few years, every one of these challenges will be further complicated by the belated and patchwork attempts to mitigate and adapt to a changing global climate. A fundamental transformation of the world's economic paradigm away from the carbon foundations of the past nearly two centuries will require vast global flows of technology and capital.

Question 15.

Question 5 (Macroeconomics, 30 points). Assume that, in the short run, there are two types of "shocks" which may cause the level of GDP to deviate from the long run, full employment level: (1) changes in autonomous investment spending; and (2) changes in autonomous money demand.

Explain how you reached your results for all the parts of this question (a. through d.). You should feel free to use graphs or equations where appropriate. For all the parts of this question (a. through d.), analysis should be conducted for the short run only

a.(9 points) Suppose that the Fed sticks to money supply targeting: in response to any investment spending or money demand shocks, the Fed will leave the money supply at the predetermined and targeted level. How will this money supply targeting strategy affect the deviations of output from the full employment level under each of the two types of shocks?

b.(9 points) Now suppose that the Fed targets the interest rate: In response to any shocks, it adjusts the money supply to maintain the interest rate at its initial 5 targeted level. How will this interest rate targeting strategy affect the variations of output from the full employment level under each of the two types of shocks?

c.6 points) If the only source of "shocks" in the economy is autonomous investment spending, should the Fed stick to money or interest rate targets to best stabilize GDP?

d.(6 points) If the only source of "shocks" in the economy is fluctuating autonomous money demand, should the Fed stick to money or interest rate targets to best stabilize GDP?