When a supply shock occurs in the short run, the best policy is to target nominal income or output in order to spread the shock's impact between income and output losses and price level increases.

Question

Quizplus · Accepted Answer

Targeting nominal income or output helps to minimize the impact of a supply shock by spreading the losses between income and output rather than letting them be absorbed solely through price level increases. This approach can help to mitigate the negative effects on both consumers and producers in the short run.

When a Supply Shock Occurs in the Short Run, the Best