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Chapter 24: Q.6 (page 655)

Why do temporary negative supply shocks pose a dilemma for policymakers?

Short Answer

Expert verified

Negative supply shocks are destructive to the economy which is a dilemma for policymakers

Step by step solution

01

Step 1. Introduction

The framework established by the central bank in order to accomplish economic growth and stabilise the country's economy is known as monetary policy.

02

Step 2. Explanation

Temporary negative supply shocks raise inflation and unemployment rates, necessitating a contractionary monetary policy to lower inflation while choosing for an expansionary monetary policy lowers unemployment. The unemployment rate will rise as a result of contractionary monetary policy, whereas inflation will rise as a result of expansionary policy. As a result, negative supply shocks are destructive to the economy, and policymakers are stuck trying to figure out what monetary policy to use to stabilise economic activity and inflation.

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