Question

The economy expeciences a negetive supply shock, it the government initiates fiscal policy this would be eithar a change in tavers or a change in government spending

a. True
b. False

Answer 1

False. The appropriate government response to a negative supply shock is contractionary fiscal policy, involving increasing taxes or cutting government spending, to reduce inflationary pressures and stabilize the economy while maintaining full employment.

Step-by-step explanation:

False. The statement is incorrect. When the economy experiences a negative supply shock, the appropriate government response would be contractionary fiscal policy, which involves increasing taxes or cutting government spending.

The appropriate government response to a negative supply shock is contractionary fiscal policy, involving increasing taxes or cutting government spending, to reduce inflationary pressures and stabilize the economy while maintaining full employment.

This is done to reduce aggregate demand, counteract inflationary pressures, and stabilize the economy by reducing the pressure for a higher price level while the economy remains at full employment. The Keynesian response would be to shift aggregate demand to the left, reducing inflationary pressures while maintaining full employment.