Monetary policy works best to counteract
A) negative aggregate demand shocks.
B) negative supply shocks.
C) positive supply shocks.
D) Solow growth shocks.

Question

Quizplus · Accepted Answer

Monetary policy is most effective in countering negative aggregate demand shocks, as it can stimulate demand and boost economic activity by lowering interest rates and increasing the money supply. It is less effective in countering negative supply shocks, which are caused by factors such as natural disasters or sudden disruptions in production, as these shocks lead to higher prices and a decrease in output. Positive supply shocks, which result in lower prices and increased output, do not require monetary policy intervention, as they are beneficial for the economy. Solow growth shocks, which refer to long-term changes in productivity and technology, are also not directly affected by monetary policy, although it can indirectly impact them by influencing investment and consumption decisions.

Monetary Policy Works Best to Counteract