If a negative real shock affects the economy's long-run potential growth rate and the Fed responds by lowering the money supply growth rate,then the economy will experience:
A) too little real growth and low inflation.
B) too little real growth and high inflation.
C) high real growth and low inflation.
D) high real growth and high inflation.

Question

Quizplus · Accepted Answer

A negative real shock would decrease the economy's long-run potential growth rate, and the Fed's response of lowering the money supply growth rate would decrease overall demand and put downward pressure on prices. This would result in too little real growth and low inflation.

If a Negative Real Shock Affects the Economy's Long-Run Potential