Can monetary policy maintain a constant price level when confronted with the effects of an adverse supply shock?
A)Yes,if the economy is characterized by real and/or nominal wage rigidity.
B)No,if the economy is characterized by real and/or nominal wage rigidity.
C)Yes,if the economy is characterized by continuous renegotiation.
D)No,if the economy is characterized by overlapping contracts.

Question

Quizplus · Accepted Answer

When confronted with the effects of an adverse supply shock, monetary policy cannot maintain a constant price level because the shock causes a decrease in aggregate supply, leading to an increase in the price level. Real and/or nominal wage rigidity can make it difficult for wages to adjust to the new price level, but this does not guarantee that monetary policy can maintain a constant price level. Continuous renegotiation can help mitigate the effects of adverse supply shocks but again does not guarantee a constant price level. Overlapping contracts can exacerbate the effects of adverse supply shocks, making it even harder for monetary policy to maintain a constant price level.

Can Monetary Policy Maintain a Constant Price Level When Confronted