It is easier for a central bank to stabilize both inflation and real growth following an aggregate demand shock than following a real shock.

Question

Quizplus · Accepted Answer

Following an aggregate demand shock, the central bank can use monetary policy to stimulate demand and stabilize both inflation and real growth. However, in the case of a real shock, such as a supply shock, there may not be a straightforward solution and it may be more difficult for the central bank to stabilize both inflation and real growth simultaneously.

It Is Easier for a Central Bank to Stabilize Both