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,real GDP will become ________ potential GDP and the economy will move to the ________ along an existing Phillips curve.
A) greater than; right
B) greater than; left
C) less than; right
D) less than; left

Question

Quizplus · Accepted Answer

A positive demand shock will increase aggregate demand, leading to an increase in both price level and output. As the economy was initially in equilibrium with no output gap, the increase in output will push real GDP above potential GDP. Along with it, the actual inflation rate will also exceed expected inflation. This will cause the Phillips curve to shift to the right, indicating a higher inflation rate for any given rate of unemployment. Therefore, the correct answer is A) greater than; right.

Suppose the Economy Is in Equilibrium with an Output Gap