Real Interest rate (%) 1 IS1 ISo Output Inflation (%) VPC PC=2 ye Output Figure 3 A shock to the economy Figure 3 shows an economy initially in equilibrium on ISo at output, Ye, and inflation on target at 2%. A shock then hits the economy, shifting the IS curve upwards from ISo to IS1. Which of the following statements are correct? (Choose one or more answers) Select one or more: O An appropriate monetary policy response to return inflation to target would be to increase the base rate. O The economy is hit by a supply shock. O The economy is hit by a demand shock. U An appropriate monetary policy response to return inflation to target would be to reduce the base rate.

Real Interest rate (%) 1 IS1 ISo Output Inflation (%) VPC PC=2 ye Output Figure 3 A shock to the economy Figure 3 shows an economy initially in equilibrium on ISo at output, Ye, and inflation on target at 2%. A shock then hits the economy, shifting the IS curve upwards from ISo to IS1. Which of the following statements are correct? (Choose one or more answers) Select one or more: O An appropriate monetary policy response to return inflation to target would be to increase the base rate. O The economy is hit by a supply shock. O The economy is hit by a demand shock. U An appropriate monetary policy response to return inflation to target would be to reduce the base rate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Real
Interest
rate (%)
IS1
ISo
Output
Inflation (%)
VPC
PC=2
ye
Output
Figure 3 A shock to the economy
Figure 3 shows an economy initially in equilibrium on ISo at output, Y, and inflation on target at 2%. A
shock then hits the economy, shifting the IS curve upwards from ISo to IS1. Which of the following
statements are correct? (Choose one or more answers)
Select one or more:
U An appropriate monetary policy response to return inflation to target would be to increase the base
rate.
O The economy is hit by a supply shock.
O The economy is hit by a demand shock.
An appropriate monetary policy response to return inflation to target would be to reduce the base
rate.

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