The statement,"With a permanent adverse supply shock,the government should engage in extinguishing policy changes," is true only if
A)the social costs of higher inflation are small and less than the social cost of less output.
B)the social costs of lost output are less than the social cost of permanently.
C)accommodating policy is impossible to conduct.
D)neutral policy is impossible to conduct.

Question

Quizplus · Accepted Answer

A permanent adverse supply shock leads to a decrease in output and an increase in prices. The government can either accommodate the shock by allowing prices to rise, or it can try to fight the shock by implementing policies that reduce prices but also reduce output (i.e., extinguishing policy changes). The government should pursue extinguishing policy changes only if the social cost of lost output is less than the social cost of permanently higher inflation. In other words, putting in place policies that hurt output may not be worth it if the benefits of lower inflation are small.

The Statement,"With a Permanent Adverse Supply Shock,the Government Should Engage