Monetary Policy: The Negative Real Shock Dilemma

What is the immediate effect of a negative real shock, such as a rapid increase in oil prices, on an economy's GDP growth and inflation rate?

• Both GDP growth and inflation decrease.

• GDP growth decreases, and inflation increases.

• GDP growth increases, and inflation decreases.

• Both GDP growth and inflation increase.

When an economy faces both sluggish growth and high inflation due to a negative real shock, what is the central bank's policy dilemma?

• It can easily achieve both lower inflation and higher growth simultaneously.

• Actions to reduce inflation will likely further decrease economic growth.

• Actions to increase economic growth will likely further decrease inflation.

• The central bank has no effective tools to address either issue.

Why might a central bank mistakenly implement a policy that worsens an impending recession?

• They intentionally aim to create recessions for long-term stability.

• Inflation data might show an increase before the decline in economic growth is clearly visible.

• They prioritize reducing unemployment over controlling inflation.

• They are unaware of the current state of the economy.

How can a negative real shock, like a sudden rise in oil prices, also lead to a negative aggregate demand shock?

• It directly increases consumer spending and investment.

• It causes people to become more optimistic, leading to increased demand.

• It makes people pessimistic and reduces their spending, causing aggregate demand to fall.

• It has no direct impact on aggregate demand.