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)output will be unchanged.
C)output will be at its potential.
D)all of the above.
E)both A and C.

Question

Quizplus · Accepted Answer

When the economy suffers a negative supply shock, it causes the cost of production to increase, leading to a leftward shift in the short-run aggregate supply (SRAS) curve. This leads to both higher prices and lower output, as shown in the graph. 
If the central bank adjusts its monetary policy to keep inflation at the target rate, it would lead to a decrease in aggregate demand (AD) and result in a downward pressure on both output and prices. 
However, in the long run, as wages and prices adjust, the SRAS curve will shift back to the right, resulting in output returning to its potential level, but at a higher price level. Therefore, the output will be at its potential level in the long run, but in the short run, there will be a decrease in output. Overall, the correct answer is E, both A and C.

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