If the Fed mistakenly believes that potential output is higher than it actually is, it might conduct inflationary monetary policy.

Question

Quizplus · Accepted Answer

If the Fed believes that potential output is higher than it actually is, it might set its monetary policy to promote economic growth and expansion, which in turn could lead to inflation if the actual potential output is not as high as perceived by the Fed.

If the Fed Mistakenly Believes That Potential Output Is Higher