The immediate effect of a positive price shock that is not accommodated in any way by a change in either fiscal or monetary policy is
A) a reduction of GDP below its potential caused by higher interest rates and the need to maintain equilibrium in the money market.
B) an equally sudden reduction in prices that negates the need for a correcting recession.
C) a short boom in which GDP actually climbs above potential to support the inflation caused by the price shock.
D) a contraction in consumption and investment that keeps GDP at its potential even given the higher prices.
E) none of the above.
Correct Answer:
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