If policy makers want to get the price level quickly back to its original level following an adverse supply shock, they need to
A)implement restrictive monetary policy
B)decrease taxes
C)increase government transfer payments
D)combine a tax increase with an increase in government spending of equal magnitude
E)levy a tariff on imported oil

Question

Quizplus · Accepted Answer

Implementing restrictive monetary policy such as increasing interest rates would decrease spending and aggregate demand, which would put downward pressure on prices and mitigate the effect of the adverse supply shock. Decreasing taxes or increasing government transfer payments would increase aggregate demand and exacerbate the inflationary effect of the supply shock. Combining a tax increase with an increase in government spending of equal magnitude would also increase aggregate demand and lead to inflation. Levying a tariff on imported oil would only affect the supply of oil and not necessarily address the overall inflationary impact of the supply shock.

If Policy Makers Want to Get the Price Level Quickly