-Refer to Figure 16-2.Suppose a supply shock shifts aggregate supply from AS₁ to AS₂ and decreases output below full employment.Which of the following statements is most accurate?
A) By increasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level.
B) By decreasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level.
C) By increasing the money supply,the Fed can stabilize the price level but output will remain below the full-employment level.
D) By increasing the money supply,the Fed can return output to its full-employment level but at the expense of a further increase in the price level.
E) By increasing the money supply,the Fed can stabilize the price level and return output to its full-employment level but must sacrifice its interest rate target.

Question

-Refer to Figure 16-2.Suppose a supply shock shifts aggregate supply from AS₁ to AS₂ and decreases output below full employment.Which of the following statements is most accurate?
A) By increasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level. 
B) By decreasing the money supply,the Fed can stabilize the interest rate and price level and return output to its full-employment level. 
C) By increasing the money supply,the Fed can stabilize the price level but output will remain below the full-employment level. 
D) By increasing the money supply,the Fed can return output to its full-employment level but at the expense of a further increase in the price level. 
E) By increasing the money supply,the Fed can stabilize the price level and return output to its full-employment level but must sacrifice its interest rate target.

Quizplus · Accepted Answer

Increasing the money supply can boost aggregate demand, potentially returning output to full employment, but it may also lead to higher price levels, exacerbating inflation.