If the government stimulates aggregate demand in response to an adverse supply shock,
A)the inflation rate will increase but frictional unemployment will decrease
B)the unemployment rate will increase but the inflation rate will decline
C)an increase in unemployment can be avoided but only at the cost of increased inflation
D)high inflation can be avoided but the rate of unemployment will increase
E)the inflation and unemployment rates will be reduced simultaneously

Question

Quizplus · Accepted Answer

Stimulating aggregate demand in response to an adverse supply shock can help avoid an increase in unemployment but typically leads to higher inflation, as the increased demand puts upward pressure on prices.

If the Government Stimulates Aggregate Demand in Response to an Adverse