This is a discussion question worth 10 points: Student often struggle to underst

Question

This is a discussion question worth 10 points:

Student often struggle to understand why monetary policy sometimes has an effect on output and other times does not. Students tend to think either the monetary policy SHOULD or SHOULD NOT always have an effect. Yet economic theory says the same change in monetary policy will have an effect only in certain situations.

Consider the following statements and relate them to the ideas of why the impact of monetary policy differs when it is anticipated vs unanticipated, and why it differs in the short run and the long run.

Bob: "Boy, I just didn't know what to expect on Dr. Smith's first exam, and I really studied wrong for it. I'll adjust my studying techniques from now on."

Jim: "I had Dr. Smith last semester and knew what to expect, so I was prepared."

Again - please clarify both anticipated vs unanticipated and short and long run.

Explanation / Answer

Anticipated is the expected change or the trend in the variable while unanticipated is the unexpected cahnge or pattern one that can't be defined based on the past observations. Anticiapted change is more of a long run term where we have all the information and we form our expecatitions are perfect. However, in the short run we have unanticipated shocks. Thus we have that in short run the impact of a change is more effcetive and changes the real variables while in the long run people adjust their expecations and the changes are not effective. Like wise an increase in money supply that is unanticipated in the shrt run impacts the GDP and the economy grows because of lower interst rate which induce increased investment whereas an anticipated change in money supply doesn't affect peoples behvious and consumption pattern and thus fails to have a real impact.

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