If policy-makers attempt to offset a downward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.
A) "tightening";a higher
B) "tightening";a lower
C) "easing";a higher
D) "easing";a lower
E) "easing";the same

Question

Quizplus · Accepted Answer

If policy-makers use monetary tightening to offset a downward inflation shock, they will be reducing the money supply, which will lead to higher interest rates, lower aggregate demand, and, therefore, lower inflation. However, in the long run, the economy will return to its potential output level, but with lower inflation than the initial equilibrium. Therefore, the resulting long-run equilibrium will be at a lower inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

If Policy-Makers Attempt to Offset a Downward Inflation Shock with Monetary