Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from πto π¹ will lead to a short-run equilibrium at point ___ and eventually to a long-run equilibrium at point ____, if left to self-correcting tendencies. A) A; B B) A; C C) B; A D) B; C

Question

Quizplus · Accepted Answer

An adverse inflation shock is modeled as an upward shift of the SRAS curve. In the short run, this results in higher inflation and lower output at point A. As a result of this recessionary gap, inflation will gradually start to decrease again - shifting the SRAS line back down. When inflation has fallen enough, the economy is back in long-run equilibrium at C again.

Based on the Figure Below