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 negative 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 negative demand shock will cause a decrease in aggregate demand, leading to a decrease in both real GDP and potential GDP. This means that real GDP will become less than potential GDP. As a result, the economy will move to the left of the existing Phillips curve, indicating a higher unemployment rate and a lower inflation rate. Therefore, the correct answer is (D) less than; left.

Suppose the Economy Is in Equilibrium with an Output Gap