Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed. How would the Fed respond to an event that contracted aggregate demand? How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply? In each case, is there another monetary policy that would lead to greater stability in output?

Recently, some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed. How would the Fed respond to an event that contracted aggregate demand? How would the Fed respond to an event that caused an adverse shift in short-run aggregate supply? In each case, is there another monetary policy that would lead to greater stability in output?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section16.3: Using Policy To Stabilize The Economy

Problem 3QQ

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