If the Federal Reserve wishes to avoid short-run increases in the unemployment rate,the correct response to a negative AD shock would be:
A) an increase in government spending growth.
B) a tax cut.
C) an increase in money supply growth.
D) a lower goal for inflation.

Question

Quizplus · Accepted Answer

If there is a negative AD shock, the correct response of the Federal Reserve would be to increase the money supply growth to stimulate economic activity and prevent short-run increases in the unemployment rate. Both choices A and B would increase aggregate demand, but they may not be effective in preventing unemployment in the short run. Lowering the goal for inflation (choice D) would not directly address the negative AD shock and may even harm the economy if inflation expectations become unanchored.

If the Federal Reserve Wishes to Avoid Short-Run Increases in the Unemployment