Question

10) When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A) inflation rate will be higher. B) output will be at its potential. C) aggregate demand curve shifts rightward. D) all of the above. E) both A and B.

Answer 1

Answer:

The answer is D.

Explanation:

Economy shock is when an expected shock happens to an economy. This shock can be positive or negative.

In the vein, supply shock is an unexpected event that happens to the supply of a product. It can also be positive or negative too.

Positive supply shock increases output while negative supply shock decreases output.

For a temporary negative supply shock and monetary policy makers try to stabilize economic activity in the short run, the following will occur:

1. Aggregate demand curve shifts rightward, meaning demand will rise because supply will automatically reduce. This makes demand to be higher than supply.

2. Inflation rate will be high. Because supply is reduced, price of goods will increase and this is an inflation.

3. Output will be at its potential. When an economy is close to potential output, the price will increase more than the output and aggregate demand will rises.