Answer to Question #242101 in Macroeconomics for Leeza

Question

‘Policymakers who can influence AD cannot offset the adverse effects of a recession due to a fall in AS’. Do you agree with this statement? Explain the answer in words and using an AD-AS diagram.

Answer 1

The statement is not true.

This is because, under a recession, Policymakers play a role in employment of the necessary policy, for instance, increase supply of money, increase the quantity of loans, shift aggregate demand curve to the right and reduce interest rates. All these effects have a positive impact on aggregate supply.