Exhibit 8-1
-Refer to Exhibit 8-2.Based on the given change,what word (rises or falls)should go in blank (3)and blank (4),respectively,to summarize the resulting impact on short run equilibrium?
A)rises;rises
B)falls;falls
C)rises;falls
D)falls;rises

Question

Exhibit 8-1 
-Refer to Exhibit 8-2.Based on the given change,what word (rises or falls)should go in blank (3)and blank (4),respectively,to summarize the resulting impact on short run equilibrium?
A)rises;rises 
B)falls;falls 
C)rises;falls 
D)falls;rises

Quizplus · Accepted Answer

Since there is a negative supply shock, it will cause the price level to rise (shown by blank 1) and the output level to fall (shown by blank 2). This results in inflationary pressure (shown by blank 5) and a contraction in real GDP (shown by blank 6). Therefore, in order to restore short-run equilibrium, the price level needs to rise further (shown by blank 3) while output level needs to fall even more (shown by blank 4). Hence, the correct answer is "rises; falls", which is option C.

Exhibit 8-1 -Refer to Exhibit 8-2.Based on the Given Change,what Word (Rises