Policy CANNOT offset the effects of a:
A) positive demand shock by decreasing government spending.
B) negative demand shock by cutting taxes.
C) negative supply shock by increasing money supply.
D) positive demand shock by increasing taxes.

Question

Quizplus · Accepted Answer

A negative supply shock is caused by a decrease in the availability or an increase in the cost of inputs, which leads to an increase in production costs and a decrease in aggregate supply. An increase in the money supply would lead to inflation, but it would not increase aggregate supply and would not offset the negative supply shock. Therefore, policy cannot offset the effects of a negative supply shock by increasing the money supply.

Policy CANNOT Offset the Effects of A