In face of a negative supply shock, the Bank of Canada may avoid a rise in unemployment only if it is willing to increase the rate of inflation.

Question

Quizplus · Accepted Answer

If the Bank of Canada is willing to increase the rate of inflation, it may be able to offset the negative supply shock by creating a temporary increase in demand and thereby avoiding a rise in unemployment. This is because higher inflation expectations may lead to higher spending and investment, which can stimulate the economy and offset the negative impact of the supply shock. However, this strategy may come at the cost of higher inflation in the long run.

In Face of a Negative Supply Shock, the Bank of Canada