If the Economy Is Hit by a Negative Real Shock

question 205

Multiple Choice

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.

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Definitions:

Hormones

Chemical messengers produced by glands in the body that regulate various physiological processes and behaviors.

Endocrine Glands

These are glands in the body that secrete hormones directly into the blood rather than through a duct.

Diathesis-Stress Model

A psychological theory that explains behavior as a result of a predispositional vulnerability together with stress from life experiences.

Predictive

Relating to the ability to foretell or forecast future events or outcomes based on current or past data.