When a permanent negative supply shock hits the economy ________.

Question

Quizplus · Accepted Answer

A permanent negative supply shock means that the economy's production capacity is permanently reduced. In the long-run, this leads to lower output levels whether the central bank reacts or not. Inflation may initially decrease in the short-run due to lower demand, but in the long-run, it may increase due to reduced supply. Therefore, options B and C are incorrect. Therefore, the correct option is A.

When a Permanent Negative Supply Shock Hits the Economy ________