Policy makers are said to "accommodate" an adverse supply shock if they ?
Correct answer: D. respond to the adverse supply shock by increasing aggregate demand, which further raises prices
- A. fail to respond to the adverse supply shock and allow the economy to adjust on its own.
- B. respond to the adverse supply shock by decreasing aggregate demand which lower prices
- C. respond to the adverse supply shock by decreasing short run aggregate supply
- D. respond to the adverse supply shock by increasing aggregate demand, which further raises prices
Explanation
Accommodating an adverse supply shock means expanding aggregate demand, often through monetary or fiscal policy. This supports output but adds further upward pressure to the price level, as stated in option d.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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