Faced with an adverse supply shock, what can policymakers increase, and how will prices and output be affected?
A) They can increase aggregate demand, which increases prices and output.
B) They can increase aggregate demand, which decreases prices and increases output.
C) They can increase aggregate supply, which increases prices and output.
D) They can increase aggregate supply, which decreases prices and increases output.

Question

Quizplus · Accepted Answer

Increasing aggregate demand in response to an adverse supply shock will indeed increase prices due to the higher demand in the face of reduced supply. Output may also increase as producers respond to the higher prices by attempting to increase production, despite the supply shock.

Faced with an Adverse Supply Shock, What Can Policymakers Increase