If the central bank responds to repeated negative supply shocks with monetary validations,the economy will be faced with

Question

Quizplus · Accepted Answer

When the central bank responds to repeated negative supply shocks by validating them with monetary policy (e.g., by increasing the money supply to counteract the negative effects on the economy), it tends to lead to continuous inflation. This is because the increase in the money supply, intended to stimulate the economy, can raise overall demand, which, when supply is constrained, results in higher prices on an ongoing basis.

If the Central Bank Responds to Repeated Negative Supply Shocks