Question

which of the statements is true?
○ fiscal policy is less effective when a recession is caused by a real shock.
○ fiscal policy is the best option to address unacceptably high inflation rates.
○ fiscal policy can effectively cause permanent shifts in short - run aggregate supply.
○ fiscal policy is primarily used to change interest rates.

Explanation:

• Analyze each option:
• Option 1: Fiscal policy (tax/spending) is less effective in recessions from real shocks (like supply - side issues) as it targets demand. Monetary policy often deals with interest rates. So this is correct.
• Option 2: Fiscal policy (demand - side) doesn't fix supply - side (short - run aggregate supply) shifts. Supply - side policies are better for that. So this is wrong.
• Option 3: Monetary policy (not fiscal) is primary for interest rates. Fiscal policy affects government spending/taxes. So this is wrong.
• Option 4: High inflation can be addressed by contractionary fiscal policy (cut spending/raise taxes) to reduce demand, but it's not the "best" in all cases (monetary policy also plays a role), and the first option is more accurate about fiscal policy's limitations in real - shock recessions.

Answer:

A. Fiscal policy is less effective when a recession is caused by a real shock.