Given an adverse supply shock,an "accommodating policy" will
A)maintain the inflation rate and the output ratio.
B)lower the inflation rate and the output ratio.
C)raise the inflation rate and the output ratio.
D)maintain the output ratio but allow inflation to increase.

Question

Quizplus · Accepted Answer

An accommodating policy refers to a monetary policy that allows inflation to increase while maintaining the output ratio, in order to mitigate the negative effects of an adverse supply shock. This is done by keeping interest rates low, which encourages borrowing and spending, and ultimately helps to maintain output. However, the downside of this policy is that it can lead to higher inflation in the long run. Therefore, D is the correct answer.

Given an Adverse Supply Shock,an "Accommodating Policy" Will