A positive demand shock will increase output and price levels. Therefore, expansionary monetary policy should be implemented to restore the economy to equilibrium.

Question

Quizplus · Accepted Answer

A positive demand shock increases output and price levels, indicating that the economy is already above the equilibrium level. Implementing expansionary monetary policy would further increase demand and worsen inflationary pressures. Instead, contractionary monetary policy may be more appropriate to reduce demand and bring the economy back toward equilibrium.

A Positive Demand Shock Will Increase Output and Price Levels