The most appropriate monetary policy response to an asset price bubble for a central bank is to:
A) react to asset price bubbles because they can easily be identified.
B) not react to asset price bubbles because its actions will lead to a recession.
C) react to asset price bubbles aggressively because they cannot be popped any other way.
D) not react to asset price bubbles because monetary policy can only affect aggregate demand,not demand in a specific market.

Question

Quizplus · Accepted Answer

Monetary policy can only affect aggregate demand, not demand in a specific market. This means that reacting to an asset price bubble through monetary policy may not be effective and could even lead to unintended consequences such as a recession. Therefore, the most appropriate monetary policy response to an asset price bubble for a central bank is to not react to it. Instead, the central bank should focus on maintaining its monetary policy targets, such as inflation or employment, and monitor the situation closely for any potential spillover effects on the broader economy.

The Most Appropriate Monetary Policy Response to an Asset Price