Why does monetary policy deal more successfully with aggregate demand than real shocks?

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Expert Solution

Real shock is a unexpected event like draught,wars , price etc which affects the fundamental factor of production.As the real shock is unpredictable we can not estimate the effect on economy.

But On the other side monetary policy deal successfully with aggregate demand ,when the demand is increases then the price also increases so inflation then to combat inflation central bank increases the interest rate so that the money supply decreases and then demand decreases and so price decreases.

If there are deflation then central bank decreases the interest rate so money supply increases and demand increases.

So we can say that monetary policy deal more successfully with aggregate demand than real shocks.

Rahul Sunny answered 1 year ago

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