When the economy suffers a temporary 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 output drops in the short run.
B)output will return to potential output over time.
C)aggregate output is stabilized.
D)all of the above.
E)both A and B.

Question

Quizplus · Accepted Answer

A temporary negative supply shock will result in a decrease in aggregate supply, which implies a decrease in output in the short run and an increase in prices. If the central bank reacts by changing the autonomous component of monetary policy to keep inflation at the target rate, output will return to potential output over time, but since the initial shock has lower output and higher prices, the combination of the adjustment process implies that A and B are correct. So, both A and B are the correct answers.

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