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The year 1973 was a bad year for all oil-importing nations such as the United States

The year 1973 was a bad year for all oil-importing nations such as the United States. A war between Israel and the Arab nations led to a quadrupling of oil prices bythe Organization of Petroleum Exporting Countries (OPEC). This increase in oil prices greatly affected aggregate supply in oil-importing nations.

The graph below shows an economy's aggregate demand curve and its short-run and long-run aggregate supply curves (labeled AD, SRAS,and LRAS, respectively). Initially, the economy is in macro economic equilibrium. Rising oil prices raise economy-wide costs of production, shifting the SRAS curve from SRAS1 to SRAS2.

Graph

Which of the following is a dilemma that the government faces when using fiscal and/or monetary policyto stabilize an economy as depicted in the graph?

(A) Stabilization policy will either worsen the fall in output or cause higher inflation.

(B) Stabilization policy cannot affect output in the face of a supply shock.

(C) Stabilization policy will shift short-run aggregate supply back to its initial position.

(D) Stabilization policy will shift short-run aggregate supply further to the left.

Apr 26 2018 View more View Less

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