The adjustment process back to the steady state in the short-run model hinges on the:
A) rate of unemployment.
B) immediate reaction to a change in the inflation rate.
C) consumers' response to inflation shocks.
D) government's response to inflation shocks.
E) slow adjustment of inflation reflected in the aggregate supply curve.

Question

Quizplus · Accepted Answer

The short-run model assumes that the economy has a natural rate of unemployment and that in the short run, the economy may deviate from this rate due to shocks such as changes in aggregate demand. The adjustment process back to the steady state in this model relies on the slow adjustment of inflation reflected in the aggregate supply curve. As prices adjust gradually to the new equilibrium level, the economy moves back towards its natural rate of unemployment. Therefore, the best choice is E.

The Adjustment Process Back to the Steady State in the Short-Run