Fiscal Policy Is Less Effective at Combating a Real Shock A real shock shifts the long-run aggregate supply curve (LRAS) to the left (step 1), moving the economy from point a to a recession at point b. To combat the recession, the government increases

(step 2), but due to the real shock, the economy is now less productive than before, and so the increase in aggregate demand shifts the economy to point c, where the growth rate is a little bit higher but the inflation rate is much higher.