The economy is growing at its long-run potential growth rate of 3% with an inflation rate of 4%.If a positive aggregate demand shock occurs and the Fed responds by decreasing money growth,but fails to offset the aggregate demand shock,then in the short run:
A) the real growth rate will be 3%,and the inflation rate will be 4%.
B) the real growth rate will be lower than 3%,and the inflation rate will be lower than 4%.
C) the real growth rate will be higher than 3% and the inflation rate will be lower than 4%.
D) the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.

Question

Quizplus · Accepted Answer

A positive aggregate demand shock typically increases both the real growth rate and the inflation rate in the short run. If the Fed decreases money growth but fails to fully offset the aggregate demand shock, the economy will still experience higher growth and inflation than initially, but perhaps not as much as it would have without any intervention.

The Economy Is Growing at Its Long-Run Potential Growth Rate