Which of the following is true for a temporary adverse supply shock effects?
A)lower output,higher interest rate and price level
B)lower output,lower interest rate and price level
C)higher output,lower interest rate and price level
D)lower output,higher interest rate and lower price level

Question

Quizplus · Accepted Answer

A temporary adverse supply shock leads to a decrease in the quantity supplied, which results in lower output. In response, the central bank may increase interest rates to control inflationary pressure. Higher interest rates may also lead to a decrease in investment and consumption, which could further dampen output. Finally, since the supply shock is temporary, there may be an initial increase in the price level due to the supply-demand mismatch, followed by a subsequent decrease as output returns to its original level. Hence, the correct choice is A) lower output, higher interest rate, and price level.

Which of the Following Is True for a Temporary Adverse