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.

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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