Final answer:
The appropriate Federal Reserve response to a negative AD shock to avoid short-run increases in unemployment is to implement expansionary monetary policy (Option D), which involves decreasing interest rates and increasing the money supply to stimulate output and decrease unemployment.
Step-by-step explanation:
If the Federal Reserve wishes to avoid short-run increases in the unemployment rate following a negative AD shock, the correct response would be D) Implement expansionary monetary policy by decreasing interest rates and increasing the money supply. This approach is designed to stimulate economic activity, which in turn can help maintain or lower the unemployment rate. Expansionary monetary policy involves actions such as buying government securities, which increases the money supply and lowers interest rates. Lower interest rates reduce the cost of borrowing, encouraging businesses to invest and consumers to spend more, both of which can help offset the negative effects of the AD shock.
An example of this would be if there is a recession and unemployment increases, the Federal Reserve can employ an expansionary monetary policy to stimulate output and decrease unemployment. This move aims to shift the aggregate demand curve to the right, closing any recessionary gaps and helping the economy recover.
In contrast, options A, B, and C represent contractionary measures, which would likely exacerbate the unemployment issue rather than alleviate it in the face of a negative AD shock.