If the Federal Reserve accommodates an adverse supply shock,

Question

Quizplus · Accepted Answer

Accommodating an adverse supply shock by the Federal Reserve may lead to an increase in inflation expectations, which shifts the short-run Phillips curve to the right. This means that there will be higher inflation and higher unemployment in the short run. This is because accommodating the supply shock would require lowering interest rates, which can stimulate demand and increase prices in the short run. However, in the long run, the effect on inflation would be limited and the economy would return to its natural level of output.

If the Federal Reserve Accommodates an Adverse Supply Shock