Refer to the accompanying figure. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π¹ will lead to a short-run equilibrium at point ________ creating ________ gap.
A)A; an expansionary
B)A; a recessionary
C)B; a recessionary
D)B; an expansionary

Question

Refer to the accompanying figure.  Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π¹ will lead to a short-run equilibrium at point ________ creating ________ gap.
A)A; an expansionary 
B)A; a recessionary 
C)B; a recessionary 
D)B; an expansionary

Quizplus · Accepted Answer

An adverse inflation shock is modeled as an upward shift of the SRAS curve. In the short run, this results in higher inflation and lower output. This new short-run equilibrium will exist at point A, where the economy is experiencing a recessionary gap.

Refer to the Accompanying Figure