Decreasing money growth following a negative real shock allows the Fed to address both higher inflation and higher unemployment that accompanies such shocks.

Question

Quizplus · Accepted Answer

Decreasing money growth following a negative real shock would lead to lower aggregate demand and possibly exacerbate the unemployment impact of the shock. The Fed can address higher inflation by decreasing money growth, but addressing higher unemployment would require other policy tools like fiscal policy or structural reforms.

Decreasing Money Growth Following a Negative Real Shock Allows the Fed