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 undertake an expansionary monetary policy to return the economy to full employment.

Question

Quizplus · Accepted Answer

If a positive demand shock occurs, it typically leads to higher inflation. Under an inflation targeting rule, the Fed would likely implement a contractionary monetary policy to curb inflation, not an expansionary one.

Assume That the Economy Is in Full-Employment Equilibrium