Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation at the initial target level.
A)increase the target inflation rate.
B)decrease the target inflation rate.
C)maintain the initial target inflation rate.
D)shift the short-run aggregate supply curve up.

Question

Quizplus · Accepted Answer

To keep inflation at the initial target level after an adverse inflation shock, the Federal Reserve must maintain the initial target inflation rate and adjust monetary policy accordingly, such as by increasing interest rates to counteract the inflationary pressure.

Starting from Full Employment at the Initial Target Inflation Rate