Suppose that inflation is at the target rate and output has fallen substantially below potential output.A central bank with a primary objective of price stability should ________.
A)do nothing,because inflation cannot rise when unemployment is high
B)ease monetary policy,to avoid a decrease in the inflation rate
C)do nothing,because stabilizing economic activity is not a primary objective
D)ease monetary policy,because avoiding high unemployment is more important than avoiding high inflation
E)none of the above

Question

Quizplus · Accepted Answer

When output falls substantially below potential output, it can lead to deflationary pressures or a decrease in the inflation rate. Easing monetary policy can help stimulate economic activity, bringing output closer to its potential and avoiding a decrease in the inflation rate, which aligns with the central bank's objective of price stability.

Suppose That Inflation Is at the Target Rate and Output