The central bank should respond to a positive shock to AD with a decrease in money growth.

Question

Quizplus · Accepted Answer

If there is a positive shock to aggregate demand (AD), it can cause inflationary pressures which can be contained by the central bank through a decrease in money growth. When the money supply decreases, consumers and businesses have less money to spend, which would lower spending and help to reduce inflation. This is why the central bank might choose to decrease the rate of growth of money supply, perhaps by raising interest rates, to cool down the economy and prevent inflation from rising too quickly.

The Central Bank Should Respond to a Positive Shock to AD