Suppose that in response to an adverse aggregate supply shock, the Bank of Canada increased the money supply. What would happen to unemployment and inflation?
A)Unemployment and inflation would both be rise.
B)Unemployment and inflation would both fall.
C)Unemployment would rise and inflation would fall.
D)Unemployment would fall and inflation would rise.

Question

Quizplus · Accepted Answer

If the Bank of Canada increases the money supply in response to an adverse aggregate supply shock, it is attempting to increase aggregate demand in the economy. This leads to an increase in employment, as businesses respond to the increased demand by hiring more workers. However, as demand increases, prices will also rise, leading to inflation. Therefore, unemployment would fall and inflation would rise.

Suppose That in Response to an Adverse Aggregate Supply Shock