Why is monetary policy not fully effective in combating a negative supply shock?
A) The Fed has no tools that stimulate an economy after a negative supply shock.
B) When countering a negative supply shock,Fed action will cause deflation.
C) When countering a negative supply shock,Fed action will raise unemployment.
D) When countering a negative supply shock,Fed action will raise inflation.

Question

Quizplus · Accepted Answer

Monetary policy, when used to combat a negative supply shock, can indeed stimulate demand. However, because the supply shock reduces the economy's ability to produce goods and services, increasing demand through monetary policy can lead to higher prices, or inflation, rather than alleviating the initial problem.

Why Is Monetary Policy Not Fully Effective in Combating a Negative