Why is demand management an unsuitable response to an adverse supply shock?

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Question

Why is demand management an unsuitable response to an adverse supply shock?

Accepted Answer

Restoring output worsens the inflation and controlling the inflation deepens the fall in output — Award 1 mark. The two problems call for opposite responses, so supply-side measures are the appropriate answer.

Answer

Restoring output worsens the inflation and controlling the inflation deepens the fall in output

Answer

Demand management has no effect on either output or prices

Answer

Supply shocks affect only long-run aggregate supply

Answer

Demand management works only in closed economies

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