Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate.If the economy experiences a positive demand shock,the output gap will ________ and the inflation rate will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

A positive demand shock increases aggregate demand, leading to an increase in the output gap and inflation rate.

Suppose the Economy Is in Equilibrium with an Output Gap