An adverse supply shock to the economy would
A)decrease investment and raise the real interest rate whether the shock were temporary or permanent.
B)decrease investment,but might not raise the real interest rate if the shock were permanent.
C)decrease investment,but might not raise the real interest rate if the shock were temporary.
D)decrease investment,but definitely not raise the real interest rate.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as an increase in the price of oil or a decrease in production due to a natural disaster, would lead to a decrease in investment because it would make it more expensive for firms to produce goods and services. However, if the shock were permanent, then the economy would adjust over time, and the real interest rate may not necessarily rise. In contrast, if the shock were temporary, then the real interest rate might rise as firms compete for scarce resources. Therefore, Choice B is the best answer.

An Adverse Supply Shock to the Economy Would