If there is a permanent adverse supply shock
A)the rate of inflation can be held constant if real wages are kept from falling.
B)an extinguishing policy will produce an acceleration of inflation.
C)the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is upward sloping to the right.
D)a policy of accommodation at the original natural level of real GDP is not possible without an acceleration of inflation.

Question

Quizplus · Accepted Answer

If there is a permanent adverse supply shock, the economy will operate at a lower level of output, and the price level will increase. A policy of accommodation at the original natural level of real GDP will not be possible without an acceleration of inflation as it would require increasing demand to meet supply, which would be impossible without causing inflationary pressures. Therefore, D is the correct choice.

If There Is a Permanent Adverse Supply Shock