Why is monetary policy not fully effective in combating a negative supply shock? a) the Fed has no tools with which to stimulate an economy after the Solow growth curve shifts to the left  b) When...

Why is monetary policy not fully effective in combating a negative supply shock?

a) the Fed has no tools with which to stimulate an economy after the Solow growth curve shifts to the left 

b) When countering a negative supply shock, Fed action will cause deflation

c) when countering a negative supply shock, Fed action will raise unemployment

d) When countering a negative supply shock, Fed action will raise inflation

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Of these options, the best choice is D.  If the Fed takes actions that are strong enough to completely make up for the supply shock, it is likely to cause inflation.

When a supply shock occurs, there is likely to be both an increase in the price level and a decrease in real GDP.  The Fed will want to act to move GDP back...

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