Negative supply shocks confront the Fed with a dilemma because
A) full employment is no longer possible
B) the costs of fulfilling one objective are paid in terms of failure to meet the other
C) inflation cannot be prevented considering the reduced supply
D) all policy choices are equally undesirable
E) such shocks are entirely unpredictable

Question

Quizplus · Accepted Answer

Negative supply shocks cause a decrease in the supply of goods and services, leading to an increase in prices. In such circumstances, the Fed faces a dilemma because they must choose between stabilizing inflation or promoting economic growth. Attempting to do both may have conflicting policy implications and may result in costs in achieving one objective while failing to meet the other. Therefore, the best choice is B, as it accurately reflects the dilemma faced by the Fed in such situations.

Negative Supply Shocks Confront the Fed with a Dilemma Because