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

Question

Quizplus · Accepted Answer

If a positive inflation shock occurs and monetary policymakers do not change the inflation target, the central bank will tighten monetary policy to bring inflation back to the target. This will reduce aggregate demand and output will fall below potential output.

If a Positive Inflation Shock Occurs and Monetary Policymakers Do