If the economy suffers from inflation and unemployment as the result of a supply shock (such as reduction in oil production), expansionary fiscal or monetary policy would reduce unemployment but result in hyperinflation.

Question

Quizplus · Accepted Answer

Expansionary fiscal or monetary policy involves increasing government spending or lowering interest rates, which can help stimulate economic growth and reduce unemployment. However, if the cause of inflation and unemployment is a supply shock (such as a reduction in oil production), increasing demand through fiscal or monetary policy can lead to higher prices and further inflation, potentially even leading to hyperinflation. Therefore, although it may temporarily reduce unemployment, it is not a long-term solution to the underlying problem of a supply shock.

If the Economy Suffers from Inflation and Unemployment as the Result