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:

Perfectly Elastic

Describes a situation in market demand or supply where quantity demanded or supplied changes infinitely in response to even a tiny change in price.

Optimal R&D

The most efficient level of investment in research and development activities where marginal costs equal marginal benefits, maximizing net benefits.

Expected-Rate-Of-Return

The anticipated return on an investment, predicting future profit or loss.

Interest-Rate Cost-Of-Funds

The cost incurred by a financial institution to acquire the funds that it lends out to its customers, which is often influenced by prevailing market interest rates.