Final answer:
The appropriate monetary policy response to a shock depends on the nature of the shock and its impact on the economy. Generally, a countercyclical approach is recommended, where loose monetary policy is used to stimulate the economy during a recession and tight monetary policy is used to control inflation. The impact of monetary policy on output, prices, interest rates, employment, and wage rates is determined by the actions of the central bank.
Step-by-step explanation:
The appropriate monetary policy response to a shock would depend on the nature of the shock and its impact on the economy. Generally, a countercyclical approach is recommended, where loose monetary policy is used to stimulate the economy during a recession and tight monetary policy is used to control inflation. When the central bank loosens monetary policy, it increases the money supply and reduces interest rates, which stimulates aggregate demand and leads to increased output and employment. However, if the loose monetary policy goes too far, it can lead to inflation. On the other hand, when the central bank tightens monetary policy, it reduces the money supply and increases interest rates, which slows down aggregate demand and can lead to lower output and employment. It also helps control inflation.