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One of the most difficult policy decisions faced by the Federal Reserve Bank (the Fed) is how to use monetary policy in response to a real negative shock such as a severe drought. Please answer the questions and assume that the Federal Reserve Bank decides to address the negative real shock by focusing on inflation instead of a recession.
a. As a result of the real negative shock, the inflation rate in the economy will.
b. To remedy this situation, the Federal Reserve will seek to aggregate demand.
c. The Fed is likely to the money supply in order to impact aggregate demand.
d. If the Fed takes this approach, the real growth rate will from the point to which it was shifted by the real negative shock.

Respuesta :

Answer:

a. increase

b. decrease

c. decrease

d. decrease

Explanation:

a. When there is a negative shock then the economy faces problems, in that condition the price increases and that the country faces a problem of inflation as people does not have money in hand.

b. Since it is inflation situation, the demand has to be decreased which shall decrease the price and then the inflation can be controlled.

c. The supply of money shall also be decreased because to meet the lower demand the supply of money has also to be lower. People will not have money in hand they will not have demand.

d. So basically with all this the growth rate will decrease but that the impact of negative shock shall also decrease.

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