Figure 12.1 -Refer to Figure 12.1...Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,the central bank response will A) push the economy further down the Phillips curve, lowering the inflation rate further. B) push the economy back up the Phillips curve, raising the inflation rate toward its full-employment level. C) push the economy back down the Phillips curve, lowering the inflation rate towards its full-employment level. D) push the economy further up the Phillips curve, lowering the inflation rate further.

Question

Quizplus · Accepted Answer

The central bank's appropriate response to a negative demand shock would be to implement expansionary monetary policy, which would increase aggregate demand, moving the economy back up the Phillips curve and raising the inflation rate toward its full-employment level.

Figure 12.1 -Refer to Figure 12.1...Suppose the Economy Is Initially at Full