In the short-run,the impact of an adverse supply shock is to
A)reduce real GDP and increase the inflation rate if the growth of nominal GDP remains the same.
B)reduce real GDP and leave the inflation rate unchanged if the growth of nominal GDP is reduced enough.
C)maintain the same level of real GDP and increase the inflation rate if the growth of nominal GDP is increase enough.
D)All of the above

Question

Quizplus · Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices, can lead to different outcomes depending on the response of nominal GDP growth. If nominal GDP growth remains the same, real GDP can decrease while inflation increases (A). If nominal GDP growth decreases sufficiently, it can lead to a reduction in real GDP without changing the inflation rate (B). If nominal GDP growth increases enough, it can maintain real GDP levels but at the cost of higher inflation (C). Therefore, all the given scenarios are possible outcomes of an adverse supply shock.

In the Short-Run,the Impact of an Adverse Supply Shock Is