Question

c. Now consider how the goals of the Fed influence its response to these shocks. Suppose that in scenario A, the Fed cares only about keeping the price level stable, whereas in scenario B, it cares only about keeping output and employment at their natural levels. Place scenario A and scenario B in the appropriate category describing the Fed's proper response to a decrease in the velocity of money.

Answer 1

The Fed's reaction to a reduction in the
`velocity`
`of`
`money`.

In the short-term, a reduction in
`velocity`
`of`
`money` can reduce the
`aggregate`
`demand`. This might reduce the production at constant indicator.

If the Fed desires to stay out and service at their expected level, then it'll rise the Money supply so as to extend the
`aggregate`
`demand`. Thus, the
`aggregate`
`demand` can move rightward. Thus, this might reestablish the new
`equilibrium` purpose. Each indicator and output stay constant.