If a positive inflation shock occurs and monetary policymakers do not change the inflation target:
A) output will eventually return to potential output and inflation will equal the inflation target.
B) output will eventually rise above potential output while inflation will equal the inflation target.
C) output will eventually fall below potential output while inflation will equal the inflation target.
D) output will eventually return to potential output but inflation will exceed the inflation target.

Question

Quizplus · Accepted Answer

If monetary policymakers do not change the inflation target, then they will adjust monetary policy to bring output back to potential output in the long run. As output returns to potential, inflation will also eventually return to the inflation target. Therefore, output will eventually return to potential output and inflation will equal the inflation target.

If a Positive Inflation Shock Occurs and Monetary Policymakers Do