Starting from a long-run equilibrium,a downward inflation shock results in a short-run equilibrium with ________ inflation and ________ output.
A) higher;higher
B) higher;lower
C) higher;potential
D) lower;lower
E) lower;higher

Question

Quizplus · Accepted Answer

A downward inflation shock will initially cause a decrease in prices, leading to a lower inflation rate. This will cause a decrease in the aggregate demand as real interest rates increase, leading to a decrease in output. Thus, the short-run equilibrium will have lower inflation and higher output.

Starting from a Long-Run Equilibrium,a Downward Inflation Shock Results in a Short-Run