The dilemma facing the Bank of Canada in the event that an unfavourable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate but with a _____ price level or allow the price level to return to its original level but with a _____ level of output in the short run.
A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher

Question

Quizplus · Accepted Answer

Monetary policy can increase output to the natural rate by increasing the money supply, which raises the price level. Alternatively, it can allow the price level to decrease by not intervening, resulting in lower output in the short run.

The Dilemma Facing the Bank of Canada in the Event