From a long-run equilibrium with p = pe = 0,suppose x rises permanently to 8 and pe never rises from zero.The economy will come to rest
A)on its LP curve with p = 8.
B)at p = 0 and Y = 108.
C)back at p = 0 and Y = 100.
D)on its SP curve at p = 8.
E)on its SP curve at p = 4 and Y = 104.

Question

Quizplus · Accepted Answer

In this scenario, a permanent increase in x (an exogenous variable) with pe (expected inflation) remaining at zero will shift the short-run equilibrium to a point where the actual inflation p adjusts to match the change in x. Since the long-run equilibrium cannot be maintained with p = pe = 0 due to the change in x, the economy will adjust to a new short-run equilibrium where p equals the change in x, which is 8. This adjustment happens on the short-run Phillips curve (SP curve), as it reflects the trade-off between inflation and unemployment (or output) in the short run, given the expected inflation rate.

From a Long-Run Equilibrium with P = Pe = 0,suppose