If the economy experiences simultaneous negative aggregate demand and aggregate supply shocks,and the Fed decides NOT to intervene with expansionary policy.Short-run aggregate supply will eventually shift back to the right,which will eventually bring the economy
A) back to potential GDP at a lower price level.
B) back to potential GDP at a higher price level.
C) back to the original equilibrium price at a lower level of aggregate output.
D) back to the original equilibrium price at a higher level of aggregate output.

Question

Quizplus · Accepted Answer

Since both aggregate demand and supply shocks are negative, the economy will experience a decrease in both output and price level in the short run. As time passes, however, firms will adjust their production processes in response to the supply shock, shifting the short-run aggregate supply curve to the right. This adjustment will help to increase output while decreasing the price level. Eventually, the economy will reach potential GDP at a lower price level, which is reflected in choice A. There is no indication that the Fed intervenes with expansionary policy, so we cannot assume that this will bring the economy back to its original equilibrium or a higher level of output.

If the Economy Experiences Simultaneous Negative Aggregate Demand and Aggregate