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 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

By increasing the money supply, the Bank of Canada is attempting to stimulate demand and offset the negative effects of the aggregate supply shock on output and employment. As demand rises, firms may increase employment, leading to a fall in unemployment. However, the increased demand may also lead to an increase in prices and inflation. Therefore, unemployment would fall and inflation would rise.

Suppose That in Response to an Adverse Aggregate Supply Shock