Accommodating a negative demand shock with monetary policy to accelerate the economy causes rapid inflation.

Question

Quizplus · Accepted Answer

Accommodating a negative demand shock with monetary policy involves reducing interest rates or increasing money supply to encourage spending and investment. This can stimulate the economy and reduce unemployment in the short-term, but it can also lead to inflation if the increase in demand is not matched by a corresponding increase in supply. However, if the negative demand shock is severe and persistent, monetary policy may be necessary to prevent a deflationary spiral and promote economic recovery. In such cases, central banks may need to use unconventional monetary policies such as quantitative easing to prevent a collapse in aggregate demand.

Accommodating a Negative Demand Shock with Monetary Policy to Accelerate