If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action
A)lowers both inflation and unemployment.
B)lowers inflation but raises unemployment.
C)raises inflation but lowers unemployment.
D)raises both inflation and unemployment.

Question

Quizplus · Accepted Answer

An adverse supply shock typically leads to higher prices and lower output, which can increase unemployment. If the Federal Reserve responds by increasing the money supply, it can lower unemployment by stimulating economic activity, but it also tends to raise inflation by increasing the amount of money chasing after fewer goods and services.

If There Is an Adverse Supply Shock and the Federal