The Great Moderation consensus regarding the use of monetary policy to fight recessions is that expansionary monetary policy:
A) is ineffective because the public expects it.
B) is harmful because it only increases the aggregate price level.
C) has little impact on aggregate demand because of liquidity traps.
D) can be used to increase aggregate demand but at the cost of higher aggregate prices.

Question

Quizplus · Accepted Answer

The Great Moderation consensus recognizes that monetary policy can be effective in stimulating aggregate demand during recessions. However, this comes at a cost of potentially higher aggregate prices or inflation. This trade-off is known as the Phillips Curve, which suggests that there may be a short-run inverse relationship between unemployment and inflation. Therefore, the use of expansionary monetary policy needs to be balanced against the risk of inflation.

The Great Moderation Consensus Regarding the Use of Monetary Policy