The dilemma facing the Bank of Canada in the event that an unfavourable supply shock moves the economy away from the natural level of output is that monetary policy can either return output to the natural level,but with a ______ price level,or allow the price level to return to its original level,but with a ______ level of output in the short run.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher

Question

Quizplus · Accepted Answer

If the Bank of Canada chooses to return output to the natural level, it would need to stimulate aggregate demand through monetary policy, which would cause the price level to rise. On the other hand, if it chooses to allow the price level to return to its original level, it would need to contract aggregate demand through monetary policy, which would cause the level of output to fall further below the natural level in the short run. Therefore, option B is the best choice, as it would accept a higher price level in exchange for returning output to the natural level.

The Dilemma Facing the Bank of Canada in the Event