Which statement is TRUE regarding the effects of monetary policy when a real shock occurs?
A) Monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate.
B) Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate.
C) Monetary policy can be used only to change the real growth rate,but not the inflation rate.
D) Monetary policy can be used only to change the inflation rate,but not the real growth rate.

Question

Quizplus · Accepted Answer

When a real shock occurs, such as a sudden decrease in productivity or an increase in the price of oil, monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate. This is because the shock has already caused the economy to experience lower growth and higher inflation, and monetary policy can only address one of these issues at a time. If the central bank tries to stimulate growth through expansionary monetary policy, it will likely lead to higher inflation. Conversely, if it tries to lower inflation through contractionary monetary policy, it will likely lead to lower growth. Therefore, option B is the correct choice.

Which Statement Is TRUE Regarding the Effects of Monetary Policy