The following statement "The government has a harder time counteracting leftward shifts in AS than in AD because shifts in AS both raise prices and reduce output" is true.
The main problem is that leftward shifts in AS both raise prices and reduce output. Standard policies can only cure one of these two problems at a time. If the government raises spending or cuts taxes, output can be restored, but at the cost of even more upward pressure on prices. If the government cuts spending or raises taxes, prices can be restored to their previous levels, but output falls even further.
Which of the following statements is true?
The government has a harder time counteracting leftward shifts in AS than in AD because shifts in AS both raise prices and reduce output.
The government has a harder time counteracting leftward shifts in AD than in AS because shifts in AD both raise prices and reduce output.
The government has a harder time counteracting leftward shifts in AS than in AD because shifts in AS raise prices and output.
The government has a harder time counteracting leftward shifts in AD than in AS because shifts in AD raise prices and output.
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