Agricultural output is a large part of Econland's GDP. Particularly bad weather one year leads to an output that is smaller than normal, causing a shock to Econland's economy. Which of these correctly describes, from a Keynesian perspective, the impact of expansionary or contractionary monetary policy taken to address the situation?
A) increase M1 to reduce inflation while having no impact on unemployment, or decrease M1 to reduce unemployment while having no impact on inflation
B) increase M1 to reduce both inflation and unemployment, or reduce M1 to increase both inflation and unemployment
C) increase M1 to reduce inflation while adding to unemployment, or decrease M1 to reduce unemployment while adding to inflation
D) increase M1 to reduce unemployment but adding to inflation, or decrease M1 to reduce the inflation while adding to unemployment

Question

Quizplus · Accepted Answer

From a Keynesian perspective, increasing the money supply (M1) is seen as a way to stimulate economic activity, which can reduce unemployment but may lead to higher inflation. Conversely, decreasing the money supply is viewed as a way to control inflation but can result in higher unemployment.

Agricultural Output Is a Large Part of Econland's GDP