If policymakers attempt to offset an adverse inflation shock with monetary ________, the resulting long-run equilibrium will be at ________ inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.
A)tightening; a higher
B)tightening; a lower
C)easing; a higher
D)easing; a lower

Question

Quizplus · Accepted Answer

An adverse inflation shock is modeled as an upward shift of the SRAS curve, which in the short run results in higher inflation and lower output. The self-correcting mechanism of the economy means that inflation will gradually start to decrease until the economy is back in long-run equilibrium at the original level of inflation. If instead the central bank intervenes with monetary easing, aggregate demand will shift right and establish a long-run equilibrium where inflation remains at the higher level.

If Policymakers Attempt to Offset an Adverse Inflation Shock with Monetary