The long run result of the government responding to a negative supply side shock with increased spending will be a:
A) faster recovery, but it will cause even greater inflation.
B) slower recovery, if they misjudge their own spending.
C) faster recovery at a lower price level than allowing short-run aggregate supply to adjust on its own.
D) slower recovery, but it will cause inflation to be lower than if they did nothing.

Question

Quizplus · Accepted Answer

Increased government spending in response to a negative supply shock can stimulate demand, leading to a faster recovery. However, this can also exacerbate inflationary pressures, as the increased demand may outpace the economy's ability to supply goods and services, pushing prices higher.

The Long Run Result of the Government Responding to a Negative