Suppose the central bank targets a low rate of unemployment.If a negative real shock occurs,the real growth rate will be:
A) higher if the central bank counters the shock than if it does not react.
B) lower if the central bank counters the shock than if it does not react.
C) the same whether the central bank counters the shock or not.
D) higher or lower if the central bank counters the shock than if it does not react,depending on people's expectations.

Question

Quizplus · Accepted Answer

When a central bank counters a negative real shock, especially with the goal of targeting low unemployment, it typically does so by implementing expansionary monetary policies. These policies can include lowering interest rates or buying government securities to inject liquidity into the economy. Such actions can mitigate the impact of the shock by encouraging spending and investment, thereby supporting or even increasing the real growth rate compared to a scenario where the central bank does not intervene.

Suppose the Central Bank Targets a Low Rate of Unemployment