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1  4- Explain the dilemma for the policymakers when the economy receives a negative supply shock

Economics

4- Explain the dilemma for the policymakers when the economy receives a negative supply shock. (20 pts)

eorisi 20Y Final Final Which one of the following is false regarding indifference curves and marginal rate of substitution? Select one a Steeper indifference curves correspond to higher MAS b. Indifference curves that we higher up correspond to a lower utility CMRS indicates the taste of trade-off between the woods Indifference.curves generat passes erence can not internet 0

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A negative supply shock decreases aggregate supply, increasing price level and decreasing output, causing stagflation, and increasing unemployment. To increase output and lower unemployment, aggregate demand has to be increased. This is done using an expansionary fiscal policy (increasing government spending and/or decreasing taxes), and/or an expansionary monetary policy (increasing money supply to decrease interest rate in order to stimulate investment).

An increase in aggregate demand shifts AD curve rightward. This restores output to the initial (pre-shock) level, but increases price level still further.

Therefore, while output increases and unemployment decreases, inflation increases higher than before.

Option B is the false option.

That is higher indifference curves represent higher levels of utility. Also because of law of diminishing MRS indifference curves bow in toward the origin. Option E is correct because if two indifference curves intersects each other then there would be more than one equilibrium or more than one point where the customer can get maximum satisfaction. This violates law of indifference curves. Option D is also correct because if the level of satisfaction is high for the consumption of one good it will be lower for the consumption of second good. Therefore the curve must be a negative slope.

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