Consider an adverse supply shock in the RBC model.The central bank knows that the pre-shock level of output
A)can be maintained only by reducing the money supply.
B)can be maintained only by holding constant the money supply,
C)can be maintained only by increasing the money supply.
D)cannot be maintained by any monetary policy.

Question

Quizplus · Accepted Answer

In the Real Business Cycle (RBC) model, an adverse supply shock (such as a decrease in productivity) negatively affects the economy's potential output. The central bank cannot offset this by adjusting the money supply because the RBC model emphasizes real (not monetary) factors as the main drivers of economic fluctuations. Therefore, the pre-shock level of output cannot be maintained by any monetary policy.

Consider an Adverse Supply Shock in the RBC Model