Assume that the economy is in full-employment equilibrium.If an inflation targeting rule is used and a positive demand shock hits the economy,the Fed will use _________ monetary policy to _________.
A) expansionary return the economy to full employment
B) contractionary;keep the inflation rate low
C) expansionary;keep the inflation rate low
D) contractionary;achieve an output target

Question

Quizplus · Accepted Answer

In response to a positive demand shock, the Fed would use contractionary monetary policy to prevent the economy from overheating and to keep the inflation rate low, aligning with its inflation targeting rule.

Assume That the Economy Is in Full-Employment Equilibrium