When a permanent negative supply shock hits the economy,a permanently ________.

Question

Quizplus · Accepted Answer

A permanent negative supply shock, such as a decrease in productivity or an increase in production costs, typically leads to a lower equilibrium level of output because the economy's capacity to produce goods and services is reduced. If the central bank raises interest rates in response, it can further reduce output by making borrowing more expensive and potentially slowing down economic activity. If the central bank does not respond, the negative supply shock can lead to higher prices as the costs of production increase, leading to inflation. Therefore, all of the given outcomes can ensue following a permanent negative supply shock, making D the correct answer.

When a Permanent Negative Supply Shock Hits the Economy,a Permanently