A beneficial supply shock would cause the FE line to
A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if the shock is temporary; shift to the right if the shock is permanent.

Question

Quizplus · Accepted Answer

A beneficial supply shock would increase the productive capacity of the economy, leading to an increase in potential output. As a result, the FE line would shift to the right, indicating that the economy can now produce more without generating inflationary pressures. However, if the supply shock is only temporary, then the FE line may not shift as the economy will eventually return to its previous level of potential output.

A Beneficial Supply Shock Would Cause the FE Line to