The economy experiences a demand shock shown in the graph. Policy makers may wis

Question

The economy experiences a demand shock shown in the graph. Policy makers may wish to prevent the economy from moving to its new equilibrium because, absent any intervention: prices will remain stable and aggregate output will increase in the short-run. prices will experience inflation and aggregate output will fall in the short-run. prices will experience deflation and aggregate output will fall in the short-run. prices will experience dramatic inflation and output will fall in the long-run. Of the following, which fiscal policy will policy makers most likely enact? reduce government transfers reduce government spending cut taxes increase taxes

Explanation / Answer

1) C

Prices will go lower because of demand shock, the output also falls because there are no takers

2) C

Cut taxes, because this will put more money in consumers pockets which will help to maintain economy and improve demand.

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