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  • A policy designed to check excessive short-term fluctuations of prices and output in a national economy due to shocks (unexpected or external changes). Shocks may be attributed to changes in aggregate demand and aggregate supply. For example, a sudden increase in aggregate demand, which causes the economy to increase production beyond the natural rate, will eventually put an upward pressure on the price level. An adverse supply shock attributable to the sudden rise in input cost, for example, oil prices or union activity, will reduce output and put an upward pressure on price.

    An ideal approach to dealing with shocks is to find ways to expand consumption or employment during a recessionary period and contract consumption or excessive spending during inflationary periods. Countries with excessive balance-of-payments ...

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