Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate.It is most likely that this shock was:
A) an aggregate demand shock.
B) a real shock.
C) a productivity shock.
D) a supply shock.

Question

Quizplus · Accepted Answer

Aggregate demand shocks are typically more manageable for central banks like the Fed to address through monetary policy adjustments. By altering interest rates or engaging in open market operations, the Fed can influence aggregate demand, helping to quickly restore the economy to its long-run potential growth rate. Real, productivity, and supply shocks often require structural adjustments beyond the immediate reach of monetary policy.

Suppose the Fed Reacts to an Economic Shock and Quickly