When a temporary negative supply shock hits the economy ________.
A)the divine coincidence does not always hold
B)the divine coincidence holds in the short-run
C)the divine coincidence does not hold in the long-run
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The divine coincidence refers to the situation where stabilizing inflation also stabilizes the output gap. A temporary negative supply shock (such as a sudden increase in oil prices) disrupts this balance because stabilizing inflation under such circumstances would require tightening monetary policy, which could widen the output gap. Therefore, the divine coincidence does not always hold in the face of temporary negative supply shocks.

When a Temporary Negative Supply Shock Hits the Economy ________