Use the following diagram to answer the following questions.

-Refer to Diagram 14-2. In the above diagram, if the economy experiences inflation and unemployment caused by reduction in production of oil, the best policy to deal with both of these problems should target to:

Question

Use the following diagram to answer the following questions.
 
-Refer to Diagram 14-2. In the above diagram, if the economy experiences inflation and unemployment caused by reduction in production of oil, the best policy to deal with both of these problems should target to:

Quizplus · Accepted Answer

Inflation and unemployment caused by a reduction in production of oil indicate a negative supply shock, which shifts the aggregate supply curve to the left from AS₂ to AS₁. The best policy to deal with both problems should target to shift aggregate supply from AS₂ to AS₁, thus addressing the root cause of the problem. Shifting aggregate demand from AD₁ to AD₂ or from AD₂ to AD₁ may not address the supply-side shock and could result in stagflation (a combination of high inflation and high unemployment).

Use the Following Diagram to Answer the Following Questions