If an adverse inflation shock occurs. the Fed has the option of The Fed may also

Question

If an adverse inflation shock occurs. the Fed has the option of The Fed may also to counter-act increases in AD O reduce the inflation rate target, adjust the real interest rate target to the level at which O increase the inflation rate target, odjust the real interest rate target to the level at which saving equals investment in the long run O maintain the inflation rate target, maintain the real interest rate target saving equals investment in the long run O adjust the real interest rate target to the level at which saving equals investment in the long run. reduce the inflation rate target

Explanation / Answer

b. Adverse inflationary shock is a high increase in the normal inflation rate and is not caused by an expansionary output. The SRAS curve shifts outward. A tight monetary policy is followed to correct the adverse inflationary gap.

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