In response to a real shock,the Fed's monetary policy action will lead to _____ moving in opposite directions.
A) unemployment and inflation
B) real GDP growth and inflation
C) aggregate demand and real GDP
D) the economy's long-run growth rate and inflation

Question

Quizplus · Accepted Answer

In response to a real shock, the Fed's monetary policy action will lead to unemployment and inflation moving in opposite directions. If the Fed increases the money supply and lowers interest rates, this can stimulate demand and lead to higher inflation. However, it can also lead to higher employment as businesses expand to meet the increased demand. On the other hand, if the Fed tightens monetary policy by reducing the money supply and raising interest rates, this can reduce inflation but can also result in higher unemployment as businesses reduce production and lay off workers.

In Response to a Real Shock,the Fed's Monetary Policy Action