When supply shifts cause a downturn in the economy,

Question

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When supply shifts cause a downturn in the economy, monetary policy may be less effective in restoring the economy to its prerecession conditions. This is because the downturn is caused by a decrease in supply, not demand, and monetary policy is designed to address demand-side issues. In addition, there may be little room for further monetary stimulus if interest rates are already low. As a result, other policy tools such as fiscal policy may need to be implemented to address the supply shock.

When Supply Shifts Cause a Downturn in the Economy