The real effect of a given monetary shock is larger the more stable the underlying monetary environment.

Question

Quizplus · Accepted Answer

This is known as the "shock amplification" effect, whereby a given monetary shock has a larger impact on the economy if the underlying monetary environment is less stable or more volatile. This is because the shock disrupts the normal functioning of the economy, causing more significant changes in interest rates, exchange rates, and other key variables. In contrast, a stable monetary environment is less sensitive to individual shocks and is better able to absorb them without causing significant disruptions.

The Real Effect of a Given Monetary Shock Is Larger