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

Question

Quizplus · Accepted Answer

In the event of a negative supply shock, there is a reduction in output and an increase in prices. If the Fed wishes to mitigate the negative impact on the labor market, it may need to accommodate the shock by increasing the rate of inflation. This can help to stabilize employment and output, but it may also lead to inflationary expectations if the public perceives it as a permanent policy shift.

In Face of a Negative Supply Shock,the Fed May Avoid