When the Fed pursues a nonaccommodative monetary policy, its response to a price shock is to
A) raise interest rates sharply.
B) increase the output sensitivity of the aggregate demand inflation curve.
C) increase the money supply significantly.
D) both a and b.
E) both b and c.

Question

Quizplus · Accepted Answer

A nonaccommodative monetary policy in response to a price shock typically involves raising interest rates to control inflation, which also increases the output sensitivity of the aggregate demand inflation curve as the economy adjusts to the tighter monetary conditions.

When the Fed Pursues a Nonaccommodative Monetary Policy, Its Response