Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, how can they offset the initial shift?
A) by shifting the aggregate supply right
B) by shifting the aggregate supply left
C) by shifting the aggregate demand right
D) by shifting the aggregate demand left

Question

Quizplus · Accepted Answer

Policymakers can offset the initial shift in aggregate demand by shifting the aggregate demand curve right, which will cause an increase in output and decrease in unemployment. This can be achieved through policies such as fiscal stimulus, such as reducing taxes or increasing government spending, or monetary stimulus, such as lowering interest rates. Shifting the aggregate supply curve left or right would not necessarily offset the initial shift in aggregate demand, as it would only affect the level of output and not the level of aggregate demand.

Suppose a Shift in Aggregate Demand Creates an Economic Contraction