The appropriate policy in response to a negative real shock will depend on whether the Fed wishes to fight high inflation or low growth,but it can't address both problems with the same policy.

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Quizplus · Accepted Answer

This statement is true. Generally, in response to a negative real shock, the Fed may choose to implement contractionary policies to fight high inflation or expansionary policies to combat low growth. However, the policy that is appropriate for one problem may exacerbate the other. For example, contractionary policies to fight inflation may worsen low growth, while expansionary policies to stimulate growth may fuel inflation. Therefore, the Fed needs to carefully weigh the costs and benefits of its policy choices based on its goals and the prevailing economic conditions.

The Appropriate Policy in Response to a Negative Real Shock