If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate,which of the following is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation?
A) Increase the growth rate of the money supply.
B) Decrease the growth rate of the money supply.
C) Keep the growth rate of the money supply constant while lowering interest rates.
D) No monetary policy can achieve this goal.

Question

Quizplus · Accepted Answer

A negative real shock reduces the economy's productive capacity, and monetary policy cannot increase real GDP growth back to its long-run potential without causing inflation.

If the Economy Is Hit by a Negative Real Shock