Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Bank of Canada could move the economy more rapidly back to full employment output by:
A)increasing the money supply, but at the cost of permanently higher prices.
B)decreasing the money supply, but at the cost of permanently lower prices.
C)increasing the money supply, which would restore the original price level.
D)decreasing the money supply, which would restore the original price level.

Question

Quizplus · Accepted Answer

Increasing the money supply can stimulate economic activity and help return the economy to full employment, but it may lead to permanently higher prices due to increased demand.

Starting from Long-Run Equilibrium, If a Drought Pushes Up Food