Suppose that an adverse supply shock causes downward pressure on nominal wages and unemployment to increase.If the Fed increases the money supply to stimulate AD and restore output to its previous level (assuming no change in the labor supply)a(n)
A)one time increase in prices will result.
B)inflationary spiral will begin if the real GDP has been reduced.
C)increase in the real GDP will follow.
D)All of the above

Question

Quizplus · Accepted Answer

Increasing the money supply to stimulate AD can lead to an inflationary spiral if real GDP has been reduced, as the increased demand may continuously push prices up without a corresponding increase in output.

Suppose That an Adverse Supply Shock Causes Downward Pressure on Nominal