Suppose we are initially at a long-run SP/LP equilibrium with x = p = pe = 4.Then an adverse supply shock adds 3 percentage points to the inflation necessary to produce each level of output.An "accommodating" policy response ________ the level of nominal GDP growth so that inflation is ________ percent while (Y/YN)________.
A)lowers,4,falls
B)lowers,7,remains at 100
C)holds constant,4,falls
D)raises,4,remains at 100
E)raises,7,remains at 100

Question

Quizplus · Accepted Answer

An accommodating policy response would raise the level of nominal GDP growth to offset the adverse supply shock, resulting in higher inflation (7 percent in this case) while keeping the output level (Y/YN) at its natural rate (100 percent).

Suppose We Are Initially at a Long-Run SP/LP Equilibrium with X