Which of the following is consistent with the supply-side theories?
A)When there is a recession, the Bank of Canada should decrease the money supply.
B)A shift in aggregate supply leads to a permanent increase in the natural rate of output.
C)The government should periodically increase the minimum wage and unemployment insurance benefits.
D)Aggregate demand does not shift in the short run.

Question

Quizplus · Accepted Answer

Supply-side theories focus on increasing the potential output of the economy, and a shift in aggregate supply (which represents the quantity of goods and services that firms are willing to produce and sell at any given price level) leads to a permanent increase in the natural rate of output. Option A is inconsistent with supply-side theories, as decreasing the money supply during a recession could worsen the economic situation. Option C is inconsistent as well since supply-side theorists believe that increasing the minimum wage and unemployment insurance benefits could have negative effects on labor markets and disincentivize work. Option D is not necessarily true, as aggregate demand can shift in the short run due to various factors such as changes in consumer or investor confidence.

Which of the Following Is Consistent with the Supply-Side Theories