If the Federal Reserve reduces the growth rate of the money supply to combat a negative real shock,the inflation rate will be:
A) lower,but the growth rate will be higher.
B) lower,but the growth rate will be even lower.
C) higher,but the growth rate will be lower.
D) higher,but the growth rate will be even higher.

Question

Quizplus · Accepted Answer

A negative real shock decreases the output of goods and services, leading to an increase in prices if the amount of money circulating in the economy remains constant. To counteract this, the Federal Reserve can reduce the growth rate of the money supply. Lowering the growth rate means that the amount of money circulating in the economy is increasing at a slower pace, which reduces the potential for inflation in the short term. Therefore, the inflation rate will be lower, and the growth rate of the money supply will also be lower. Therefore, choice B is the correct answer.

If the Federal Reserve Reduces the Growth Rate of the Money