In the short run, demand and supply shocks to the economy require the same monetary policy.

Question

Quizplus · Accepted Answer

Demand and supply shocks affect the economy differently and require different monetary policy responses. For example, if there is a negative supply shock, such as a natural disaster that disrupts production, prices may increase while output decreases. In this case, the central bank may choose to raise interest rates to prevent inflation. On the other hand, if there is a negative demand shock, such as a recession, prices may decrease while output also decreases. Here, the central bank may choose to lower interest rates to stimulate economic growth. Therefore, different monetary policies are needed in response to demand and supply shocks.

In the Short Run, Demand and Supply Shocks to the Economy