Policy makers cannot achieve both price stability and economic activity stability when facing
A)temporary supply shocks.
B)permanent supply shocks.
C)demand shocks.
D)all of the above.

Question

Quizplus · Accepted Answer

Temporary supply shocks, such as natural disasters or changes in production costs, can cause fluctuations in output and prices in the short run. Policy makers can choose to prioritize either price stability or economic activity stability, but it is difficult to achieve both simultaneously. However, in the long run, supply shocks tend to dissipate and prices and output return to their previous levels. Permanent supply shocks, such as changes in technology or demographics, can have long-lasting effects on the economy and make it even more difficult for policy makers to achieve both goals. Demand shocks, such as changes in consumer preferences, can also cause short-term fluctuations in output and prices, but they are generally easier to address through monetary or fiscal policy.

Policy Makers Cannot Achieve Both Price Stability and Economic Activity