Final answer:
Supply shocks disrupt the relationship between aggregate demand and aggregate supply, creating problems for Keynesian stabilization policies. Positive supply shocks can lead to lower unemployment and inflation, which may not align with the goals of stabilization policies. Negative supply shocks can affect the effectiveness of fiscal policy in stimulating aggregate demand.
Step-by-step explanation:
Supply shocks create problems for Keynesian stabilization policies because they disrupt the relationship between aggregate demand and aggregate supply. In Keynesian economics, aggregate demand is considered to be the primary cause of a short-run economic event like a recession. However, supply shocks can lead to changes in aggregate supply, making it difficult to stabilize the economy through fiscal policy.
For example, if there is a positive supply shock, such as a decrease in energy prices, the aggregate supply curve would shift out to the right, resulting in more real GDP at a lower price level. This would lead to lower unemployment and a lower rate of inflation, which may not align with the desired goals of Keynesian stabilization policies.
In addition, supply shocks can also affect the effectiveness of fiscal policy in influencing aggregate demand. If there is a negative supply shock, such as an increase in the cost of raw materials, it can increase production costs and decrease the potential output of the economy. This would make it challenging to stimulate aggregate demand through expansionary fiscal policy, as it may lead to higher inflation without a significant increase in real GDP.