Monetary policy can deal with a spending shock more effectively than a real shock.

Question

Quizplus · Accepted Answer

Monetary policy involves controlling the money supply and interest rates, which can affect consumer and business spending. Therefore, monetary policy can be used to stimulate or dampen spending in response to a spending shock. On the other hand, a real shock, such as a natural disaster or sudden increase in oil prices, affects the physical supply of goods and services, making it more difficult for monetary policy to address.

Monetary Policy Can Deal with a Spending Shock More Effectively