Suppose oil prices rise and short-run aggregate supply decreases.If the Fed responds by increasing the quantity of money,then in the short run

Question

Quizplus · Accepted Answer

When oil prices rise and short-run aggregate supply decreases, it leads to higher inflation and higher unemployment, which is known as stagflation. If the Fed responds by increasing the quantity of money, this will lead to an increase in aggregate demand, which will increase both real GDP and the price level. However, since the short-run aggregate supply has decreased, the increase in real GDP is limited, and the price level will rise even higher. Therefore, option B is the correct answer. Option C is incorrect because if the Fed is increasing the quantity of money, it implies that they are more concerned about stimulating the economy and less about fighting inflation. Option A is incorrect because although real GDP will increase, the price level will not fall due to the increase in aggregate demand. Option D is incorrect because option B is the correct answer.

Suppose Oil Prices Rise and Short-Run Aggregate Supply Decreases