If the economy is hit by a negative real shock that raises inflation and unemployment,which fiscal policy action should the government take in order to keep inflation and unemployment stable?
A) cut taxes
B) raise taxes
C) increase government spending
D) No government action can achieve those goals.

Question

Quizplus · Accepted Answer

A negative real shock typically reduces the economy's productive capacity, leading to higher inflation and unemployment. Fiscal policy actions like cutting taxes or increasing government spending can stimulate demand but may not address the supply-side constraints causing the shock. Therefore, no government action can simultaneously stabilize both inflation and unemployment in this scenario.

If the Economy Is Hit by a Negative Real Shock