If a recession were the result of monetary policy, we should observe:
A)Inflation increasing as output decreases
B)Potential output decreasing
C)Interest rates rising as output falls
D)A high rate of money growth

Question

Quizplus · Accepted Answer

If a recession is caused by tight monetary policy, we would expect to see interest rates rising as output falls. This is because tight monetary policy involves reducing the money supply, which leads to higher interest rates as borrowing becomes more expensive. Inflation increasing as output decreases is more indicative of a supply-side shock, potential output decreasing is more indicative of a negative supply shock, and a high rate of money growth is more indicative of loose monetary policy.

If a Recession Were the Result of Monetary Policy, We