If the Fed shifts to a more restrictive monetary policy in order to help control inflation, the policy shift will generally
A) stimulate aggregate demand and real output as soon as the policy is instituted.
B) reduce aggregate demand immediately and quickly bring the inflation under control.
C) reduce aggregate demand and help bring the inflation under control, but the primary effects may not be felt for several months (or quarters).
D) lower real interest rates in the short run, but in the long run, real interest rates will rise.

Question

Quizplus · Accepted Answer

A shift towards a more restrictive monetary policy tends to reduce aggregate demand and bring inflation under control, but the effects may not be immediate. It may take several months or quarters for the primary effects to be felt. This is because it takes time for the policy changes to filter through the economy and impact spending and investment decisions. Lower real interest rates in the short run are possible due to the decreased money supply, but in the long run, real interest rates may rise to maintain control over inflation.

If the Fed Shifts to a More Restrictive Monetary Policy