When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate,then
A)aggregate demand curve shifts leftward.
B)aggregate demand curve shifts rightward.
C)output will be unchanged.
D)both A and C.

Question

Quizplus · Accepted Answer

A negative supply shock will increase costs for firms, leading to a leftward shift in the short-run aggregate supply curve. This will cause a decrease in output and an increase in inflation. To keep inflation at the target rate, the central bank may increase interest rates, which will reduce spending and shift the aggregate demand curve leftward as well. Output will be unchanged in the long run, as the economy adjusts to the shock and returns to its potential level of output.

When the Economy Suffers a Permanent Negative Supply Shock and the Central