When They Are Confronted with an Adverse Shock to Aggregate

question 23

Multiple Choice

When they are confronted with an adverse shock to aggregate supply,policymakers face a difficult choice in that

• A)if they contract aggregate demand,the unemployment rate will increase further.
• B)if they expand aggregate demand,the inflation rate will increase further.
• C)they face a less favorable trade-off between inflation and unemployment than they did before the shock.
• D)All of the above are correct.

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Definitions:

Rationally

Acting based on reason or logic, typically in a way that maximizes self-interest or advantage within certain constraints or information.

Mental Accounting

The cognitive process individuals use to organize, evaluate, and keep track of their financial activities and decisions.

Irrational Decisions

Decisions made that do not follow logical reasoning or expected outcomes.

Opportunity Cost

The missed opportunity for profit from different options when a specific choice is made.