If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money
Supply, then in the short run the Federal Reserve's action

Question

Quizplus · Accepted Answer

In the short run, an adverse supply shock (such as an increase in oil prices) leads to higher prices and lower output. If the Federal Reserve responds by increasing the growth rate of the money supply, this would lead to an increase in aggregate demand and possibly help alleviate some of the negative effects of the supply shock. However, this would also increase inflationary pressures. The short-term result of this action would be a rise in inflation and a fall in unemployment (since increased aggregate demand leads to higher output and more hiring). Therefore, the correct answer is C.

If There Is an Adverse Supply Shock and the Federal