A Central Bank Might Decide to "Validate" a Negative Supply

question 43

Multiple Choice

A central bank might decide to "validate" a negative supply shock because

• A)there is no other way to return the economy to full employment.
• B)the economy might suffer a long slump before wages and prices fall enough to restore full employment.
• C)there is no process by which the economy will return to potential output.
• D)it is an effective means of preventing inflation.
• E)there are no negative effects from this policy action.