Suppose a central bank targets a fixed rate of inflation.If a negative real shock occurs,then the central bank would use monetary policy to:
A) shift the AD curve to the right.
B) shift the AD curve to the left.
C) shift the SRAS curve to the right.
D) shift the SRAS curve to the left.

Question

Quizplus · Accepted Answer

A negative real shock would cause a decrease in aggregate demand (AD) and an increase in prices. To maintain the fixed rate of inflation, the central bank would need to use monetary policy to shift the AD curve to the left, reversing the initial decrease in AD and bringing prices back down to the target level. Therefore, the best choice is B, shifting the AD curve to the left.

Suppose a Central Bank Targets a Fixed Rate of Inflation