In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be
A) lower than the rate without responding to the negative shock.
B) higher than the rate without responding to the negative shock.
C) the same as the rate without responding to the negative shock.
D) lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth.

Question

Quizplus · Accepted Answer

By raising the growth rate of money supply, the Fed is increasing the amount of money in circulation, which lowers the real interest rate and stimulates demand for goods and services. This increase in demand puts upward pressure on prices, leading to higher inflation. Therefore, the inflation rate will be higher than the rate without responding to the negative shock.

In the Short Run, If the Fed Responds to a Negative