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 undertake an expansionary monetary policy to return the economy to full employment.

Question

Quizplus · Accepted Answer

In the scenario of a positive demand shock while the economy is at full-employment equilibrium, the Federal Reserve would likely implement a contractionary monetary policy, not an expansionary one, to combat potential inflationary pressures, aligning with the goals of inflation targeting.

Assume That the Economy Is in Full-Employment Equilibrium