Which of these statements is TRUE regarding the effects of monetary policy when a real shock occurs?
A) Monetary policy can always be used to simultaneously achieve a high real growth rate and a low inflation rate.
B) Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate.
C) Monetary policy can be used only to change the real growth rate but not the inflation rate.
D) Monetary policy can be used only to change the inflation rate but not the real growth rate.

Question

Quizplus · Accepted Answer

When a real shock occurs, it can result in a decrease in real output and an increase in prices. Monetary policy actions such as an increase in the money supply or a decrease in interest rates can stimulate economic growth and increase output. However, these actions can also lead to an increase in inflation. Therefore, it is difficult to simultaneously achieve a high real growth rate and lower the inflation rate through monetary policy alone. This is known as the "policy trade-off" and is a common challenge faced by policymakers.

Which of These Statements Is TRUE Regarding the Effects of Monetary