Suppose That There Is a Negative Aggregate Demand Shock and the Central

question 3

Multiple Choice

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible,then

• A)the public's expected inflation will remain unchanged.
• B)the short-run aggregate supply curve will rise.
• C)economic contraction will be worse.
• D)all of the above.
• E)both B and C.

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Definitions:

Federal Reserve

The central banking system of the United States, responsible for monetary policy, regulation of financial institutions, and ensuring stability of the financial system.

Recovery

Phase of business cycle during which real GDP increases from trough level to level of previous peak.

Monetary Policy

Monetary policy involves the actions of a central bank or other regulatory authorities that determine the size and rate of growth of the money supply, which in turn affects interest rates.

Excess Reserves

The amount of reserves that a bank holds beyond what is required by regulations or reserve requirements.