Suppose a recession occurs as a result of a supply shock,and instead of the economy naturally working its way back to equilibrium,the government uses policy to shift the aggregate demand curve to fight the recession.Using policy this way would
A)bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.
B)bring real GDP back to potential GDP more slowly but would bring the price level back to the original price level more quickly.
C)quickly result in a new,higher level of real GDP and a permanently lower price level.
D)bring the price level back to its original level more quickly but would result in a permanently lower level of potential GDP.

Question

Quizplus · Accepted Answer

Using policy to shift the aggregate demand curve to fight the recession would result in a quicker return to potential GDP, but it would also result in a permanently higher price level. This is because the increased demand would lead to higher prices, even at potential GDP level. Therefore, Option A is the best choice.

Suppose a Recession Occurs as a Result of a Supply