If cost-push inﬂation occurs and the government adopts a hands-off policy approach, then, according to the simple extended AD-AS model, in the long run the economy will
A) get back to where it started from.
B) get stuck with high unemployment.
C) experience an inﬂationary spiral.
D) have a higher price level.

Question

Quizplus · Accepted Answer

In the long run, the economy self-adjusts from cost-push inflation under a hands-off government policy, returning to its original long-run equilibrium with the original unemployment rate but at a higher price level. However, the correct interpretation of the model indicates that while the economy returns to its natural level of output, the price level remains higher than before the shock, aligning more with the implications of both A and D. The key point is the self-adjustment mechanism of the economy back to its potential output.

If Cost-Push Inﬂation Occurs and the Government Adopts a Hands-Off