When an aggregate demand shock hits the economy ________.
A)there is no conflict for the central bank between pursuing price or output stability because of the divine coincidence
B)the same long-run equilibrium real interest rate is reached whether the central bank intervenes or not
C)the long-run level of output is unaffected
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

An aggregate demand shock affects both inflation and output in the short run, but in the long run, the economy tends to return to its natural level of output and the natural rate of interest, regardless of central bank intervention. This is because in the long-run, prices and wages adjust to restore equilibrium, aligning with the concept of the divine coincidence where stabilizing inflation also stabilizes output.

When an Aggregate Demand Shock Hits the Economy ________