Question

Funland is initially in long-run macroeconomic equilibrium. Then, there is a supply shock due to a severe increase in commodity prices. If Funland's policy makers use active stabilization policy to offset this supply shock, then:

a. they can address issues of inflation but not other issues caused by this supply shock.
b. they can either increase the aggregate price level to its initial equilibrium level or they can decrease aggregate output to its initial level.
c. they can either reduce the aggregate price level to its initial equilibrium level, or they can increase aggregate output to its initial level.
d. they can effectively eliminate the economic effects of the supply shock.

Answer 1

Answer:

c. they can either reduce the aggregate price level to its initial equilibrium level, or they can increase aggregate output to its initial level.

Explanation:

Funland is initially in long-run macroeconomic equilibrium. Then, there is a supply shock due to a severe increase in commodity prices. If Funland's policy makers use active stabilization policy to offset this supply shock, then:  they can either reduce the aggregate price level to its initial equilibrium level, or they can increase aggregate output to its initial level.