Suppose a recession occurs as a result of a negative supply shock,and instead of the economy naturally working its way back to equilibrium,the government uses policy to shift the aggregate demand curve to fight the recession.Using policy this way would
A)bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.
B)bring real GDP back to potential GDP more slowly but would bring the price level back to the original price level more quickly.
C)quickly result in a new,higher level of real GDP and a permanently lower price level.
D)bring the price level back to its original level more quickly but would result in a permanently lower level of potential GDP.

Question

Quizplus · Accepted Answer

Using policy to shift the aggregate demand curve to fight a negative supply shock recession would bring real GDP back to potential GDP more quickly. However, it would result in a permanently higher price level due to the increased demand. This is because supply shocks are temporary disruptions in the economy that do not affect the long-run potential GDP. Therefore, using policy to stimulate demand would only have a temporary effect on real GDP.

Suppose a Recession Occurs as a Result of a Negative