It is difficult for policy makers to adopt an expansionary policy as a response to a recession caused by a negative supply shock because an:
A)expansionary policy leads to an increase in aggregate demand, which causes aggregate output to increase, causing inflation to rise.
B)expansionary policy results in a shift of the aggregate demand curve to the left, as a result of which real output decreases.
C)expansionary policy leads to an increase in aggregate demand, as a result of which the price level decreases.
D)expansionary policy results in a shift of the long-run aggregate supply curve to the left, as a result of which the price level decreases.
E)expansionary policy results in a shift of the long-run aggregate supply curve to the right, as a result of which the price level decreases.

Question

Quizplus · Accepted Answer

An expansionary policy leads to an increase in aggregate demand, which causes aggregate output to increase, causing inflation to rise. In the case of a negative supply shock, the inflationary pressure is already high due to the increase in production costs, so an expansionary policy will only worsen the inflation problem. Therefore, policy makers must be cautious and consider alternative policies, such as supply-side measures.

It Is Difficult for Policy Makers to Adopt an Expansionary