Question

Consider a situation in which a future president has appointed Federal Reserve leaders who conduct monetary policy much more erratically than in past years. The consequence is that the quantity of money in circulation varies in a much more unsystematic​ and, hence,​ hard-to-predict manner.

According to the policy irrelevance​ proposition, is it more or less likely that the​ Fed's policy actions will cause real GDP to change in the short​ run?

Answer 1

YES

Step-by-step explanation:

One of the pillars of the Central Bank's modern theory is the reliability of economic agents in the conduct of monetary policy. If the conduct of monetary policy follows a trend, with notice of changes, the Fed will have credibility with economic agents. Thus, household consumption and corporate investment follow the normal trajectory. However, if this reliability is broken, the uncertainty generated will cause economic agents to save more money and consume / invest less. This leads to a reduction in real GDP, as consumption and investment are a significant part of GDP.