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Answer to Question #19519 in Macroeconomics for micheal

Question #19519
What are the implications of using monetary compression to correct the inflationary effects of negative supply shocks?
Expert's answer
A negative supply shock means demand is suddenly too high for price stability, due to the drop in supply, and that gdp is at
capacity due to supply constraints. Therefore the fed's 'job' is certainly not
to add to demand (lower rates, the way they see causation) even with a weak
economy. Instead, they attempt to bring demand down to supply, in this case by
raising rates. and the increasing deficit means even higher rates will be
necessary to do the trick.

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