The distinction between real and nominal shocks is that
A)real shocks directly affect only the IS curve, but not the FE line or LM curve.
B)real shocks directly affect only the FE line, but not the LM curve.
C)real shocks directly affect only the IS curve or the FE line, but not the LM curve.
D)real shocks have a large direct effect on the IS curve and the FE line, but only a small direct effect on the LM curve.

Question

Quizplus · Accepted Answer

Real shocks directly affect the real side of the economy, such as changes in productivity, natural disasters, or changes in technology. They can affect the IS curve or the FE line, but they usually do not affect the LM curve directly, as they do not influence the money market. Nominal shocks, on the other hand, affect the price level or inflation rate and can have a direct impact on the LM curve. Therefore, the distinction between real and nominal shocks is that real shocks affect the real side of the economy, while nominal shocks affect the monetary side. Choice C is the best choice because it correctly identifies that real shocks can affect either the IS curve or the FE line, but not necessarily the LM curve.

The Distinction Between Real and Nominal Shocks Is That