Suppose That in Response to an Adverse Aggregate Supply Shock

question 5

Multiple Choice

Suppose that in response to an adverse aggregate supply shock, the Bank of Canada increased the money supply. What would happen to unemployment and inflation?

• A) Unemployment and inflation would both rise.
• B) Unemployment and inflation would both fall.
• C) Unemployment would rise and inflation would fall.
• D) Unemployment would fall and inflation would rise.

---

Definitions:

Expected Rate of Return

The anticipated amount of profit or loss an investment generates, expressed as a percentage of the initial investment amount.

Covariance

A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means they vary inversely.

Variance

A measure of the dispersion of a random variable. Equals the expected value of the squared deviation from the mean.