With a negative supply shock, the Federal Reserve has to decide whether to
A) reduce both inflation and unemployment.
B) increase both inflation and unemployment.
C) increase inflation or decrease employment.
D) increase inflation and decrease unemployment, or decrease inflation and increase unemployment.

Question

Quizplus · Accepted Answer

With a negative supply shock, the economy faces higher production costs and decreased output, which leads to higher inflation and higher unemployment, also known as stagflation. The Federal Reserve can choose to either increase inflation and decrease unemployment or decrease inflation and increase unemployment through its policies such as adjusting interest rates or engaging in quantitative easing. The best choice would be to pursue a balanced approach that aims to reduce both inflation and unemployment, as both high inflation and high unemployment can have negative impacts on the economy. However, since reducing both inflation and unemployment simultaneously may not always be feasible, the Fed may need to prioritize one over the other based on the current state of the economy.

With a Negative Supply Shock, the Federal Reserve Has to Decide