Any positive price shock affecting an economy initially operating at full potential
A) can be expected to cause some increase in inflation unless the economy is willing to accept some unemployment above the natural rate.
B) can be expected to cause some immediate increase in unemployment above the natural rate regardless of the policy response.
C) need not cause any increase in inflation, but only if the economy commits itself to a credible policy of maintaining output at potential GDP.
D) need not cause any increase in unemployment above the natural rate, but only if the economy commits itself to a credible policy of increased aggregate demand.
E) none of the above.

Question

Quizplus · Accepted Answer

A positive price shock in an economy operating at full potential typically leads to inflationary pressures as demand outstrips supply. Without intervention, this can lead to inflation unless the economy is willing to tolerate higher unemployment to dampen demand and control price levels.

Any Positive Price Shock Affecting an Economy Initially Operating at Full