Suppose that consumer and business confidence fall. What is the ultimate outcome for the economy if monetary policymakers respond to keep inflation on an unchanged target?
A) If monetary policymakers respond, output would remain close to potential output.
B) If monetary policymakers respond, output would fall below potential output.
C) If monetary policymakers respond, output would rise above potential output.
D) If monetary policymakers respond, output would remain close to potential output but inflation would still rise despite their actions.

Question

Quizplus · Accepted Answer

When consumer and business confidence fall, it typically leads to a decrease in spending and investment. If monetary policymakers respond by adjusting monetary policy to keep inflation on an unchanged target, they would likely lower interest rates or take other expansionary measures to stimulate spending and investment. This would help to counteract the initial drop in confidence and demand, aiming to keep output close to its potential level. The goal of such policy actions would be to avoid a significant deviation from the potential output, thereby stabilizing the economy.

Suppose That Consumer and Business Confidence Fall