A permanent price shock results in
A)a positive correlation between real GDP and inflation.
B)no correlation between real GDP and inflation.
C)an uncertain correlation between real GDP and inflation.
D)a negative correlation between real GDP and inflation.
E)a permanent decline in potential GDP.

Question

Quizplus · Accepted Answer

A permanent price shock will likely result in a negative correlation between real GDP and inflation. This is because an increase in prices will lead to a decrease in demand for goods and services, which will lower economic growth and therefore decrease real GDP. Additionally, the increased costs of production due to higher prices will lead to lower profits and potentially lower investment, further decreasing economic growth. At the same time, the higher prices will lead to higher inflation. Therefore, there is likely to be a negative correlation between real GDP and inflation in the case of a permanent price shock.

A Permanent Price Shock Results in