In Response to an Adverse Supply Shock

question 31

Multiple Choice

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

---

Definitions:

Excess Reserves

The reserves that banks hold over and above the regulatory requirements set by the central bank, often seen as a liquidity buffer.

Reserve Requirement

The reserve requirement is a central bank regulation that sets the minimum amount of reserves that must be held by a commercial bank, usually as a percentage of the bank's deposits.

Lend Out

Refers to the act of providing something, usually money, to someone with the expectation that it will eventually be returned, often with interest.

Depository Institutions Deregulation

The process of removing government restrictions on banks and other depository institutions to allow for more competition and greater efficiency in the financial sector.