If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Question

Quizplus · Accepted Answer

Increasing the money supply can stimulate economic activity, reducing unemployment towards its natural rate. However, it also increases the demand for goods and services more than the economy's capacity to produce them, leading to higher inflation and thus, higher prices.

If the Central Bank Increased the Money Supply in Response