If a price shock caused by a sharp increase in oil prices is believed to be temporary, then the Fed will
A)raise interest rates based on its monetary policy rule.
B)lower interest rates based on its monetary policy rule.
C)do nothing.
D)lower interest rates, but not by as much as it would if the price shock were permanent.
E)raise interest rates, but not by as much as it would if the price shock were permanent.

Question

Quizplus · Accepted Answer

If the Federal Reserve believes a sharp increase in oil prices is temporary, it is likely to "do nothing" in terms of adjusting interest rates immediately. This is because temporary shocks are expected to self-correct without necessitating a change in monetary policy, which is more focused on long-term economic stability and inflation control.

If a Price Shock Caused by a Sharp Increase in Oil