Refer to the accompanying figure. Starting from long-run equilibrium at point C, a favorable inflation shock that decreases 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; recessionary
D)B; expansionary

Question

Refer to the accompanying figure.  Starting from long-run equilibrium at point C, a favorable inflation shock that decreases 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; recessionary 
D)B; expansionary

Quizplus · Accepted Answer

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

Refer to the Accompanying Figure