There is an adverse supply shock.In response the Federal Reserve pursues an expansionary monetary policy.Taking into account both the shock and the Federal Reserve's policy,which of the following are we sure of?
A)unemployment will be higher
B)unemployment will be lower
C)inflation will be higher
D)inflation will be lower

Question

Quizplus · Accepted Answer

An adverse supply shock leads to higher costs of production, leading to higher prices and lower output. Expansionary monetary policy aims to stimulate economic activity and increase the money supply, which may lead to higher inflation. Therefore, we can be sure that inflation will be higher. We cannot determine the effect of the shock and policy on unemployment with certainty.

There Is an Adverse Supply Shock