To stabilize real GDP,the Fed must increase the money supply in response to a
A) positive demand shock
B) low level of unemployment
C) sudden upsurge in inflation
D) rise in the interest rate
E) negative demand shock

Question

Quizplus · Accepted Answer

To stabilize real GDP, the Fed must increase the money supply in response to a negative demand shock. This is because a negative demand shock leads to a decline in overall spending and economic activity, which can cause a recession. By increasing the money supply, the Fed can lower interest rates and make borrowing cheaper, which in turn can stimulate spending and demand. Increasing the money supply in response to other options, such as a sudden upsurge in inflation or a low level of unemployment, can have negative consequences for the economy, such as creating inflationary pressures.

To Stabilize Real GDP,the Fed Must Increase the Money Supply