If policy makers choose to use a contractionary fiscal policy as a response to the recession caused by a negative supply shock, _____.
A)both aggregate output and inflation will increase
B)both aggregate output and unemployment level will increase
C)aggregate output will and unemployment will increase
D)aggregate output will increase and unemployment will decrease
E)both unemployment and prices will decrease

Question

Quizplus · Accepted Answer

A negative supply shock causes a decrease in aggregate output and an increase in prices. If policy makers use contractionary fiscal policy, which involves reducing government spending and/or increasing taxes, it would further decrease aggregate output and increase unemployment, while also reducing inflation. Therefore, option C is the correct answer.

If Policy Makers Choose to Use a Contractionary Fiscal Policy