Based on the figure below. Starting from long-run equilibrium at point C, a favorable inflation shock that decreases inflation from πto π¹ will lead to a short-run equilibrium at point ___ creating _____gap. A) A; an expansionary B) A; a recessionary C) B; recessionary D) B; expansionary

Question

Quizplus · Accepted Answer

A favorable inflation shock is modeled as a downward shift of the SRAS curve. In the short run, this results in lower inflation and higher output. This new short-run equilibrium will exist at point A, where the economy is experiencing an expansionary gap.

Based on the Figure Below