In response to an adverse supply shock,
A) demand management could be used to restore the initial equilibrium
B) stabilizing prices would exacerbate the recession
C) interest rate hikes could be used to fend off inflation and prevent recession
D) fiscal policy can be used to push aggregate supply outward
E) a tax cut could stabilize GDP and the price level

Question

Quizplus · Accepted Answer

Stabilizing prices during an adverse supply shock can worsen a recession because it may require contractionary policies that reduce demand further, deepening the economic downturn.

In Response to an Adverse Supply Shock