When the Fed increases the money supply to counteract a negative real shock:
A) growth usually returns to the level it was before the shock.
B) half of the increase is seen in growth and half in inflation.
C) inflation increases a lot and growth increases a little.
D) growth remains stuck at the level of the negative real shock.

Question

Quizplus · Accepted Answer

When the Fed increases the money supply to counteract a negative real shock, it typically results in a significant increase in inflation and a slight increase in growth. This is because the increased money supply lowers interest rates, encouraging spending and investment, but also dilutes the value of money, leading to inflation.

When the Fed Increases the Money Supply to Counteract a Negative