How can the Fed offset a positive shock to aggregate demand?
A) Increase the growth rate of the money supply.
B) Decrease the growth rate of the money supply.
C) Increase the growth rate of government spending.
D) Decrease the growth rate of government spending.

Question

Quizplus · Accepted Answer

A positive shock to aggregate demand would cause an increase in inflation and output. To offset this, the Fed can decrease the growth rate of the money supply, which will decrease spending and inflation. Increasing government spending would exacerbate the inflationary pressure and would not be an effective measure to offset the positive shock.

How Can the Fed Offset a Positive Shock to Aggregate