Assume that the economy is in full-employment equilibrium. If an inflation targeting rule is used and a positive demand shock hits the economy, the Federal Reserve will use _____ monetary policy to _____.

Question

Quizplus · Accepted Answer

In response to a positive demand shock, the Federal Reserve would use contractionary monetary policy to counteract the inflationary pressure that results from the increased demand, aiming to keep the inflation rate low and maintain price stability.

Assume That the Economy Is in Full-Employment Equilibrium