When a temporary negative supply shock hits the economy,then in the short-run ________.
A)if the central bank focuses on stabilizing output,it cannot stabilize inflation
B)if the central bank focuses on stabilizing inflation,it cannot stabilize output
C)the divine coincidence does not hold
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

In the short-run, a temporary negative supply shock means that stabilizing output and inflation simultaneously becomes challenging. If the central bank tries to stabilize output, inflation may rise due to increased demand. Conversely, focusing on stabilizing inflation might require tightening monetary policy, which can depress output. The "divine coincidence" refers to the idea that stabilizing inflation inherently stabilizes output, but this does not hold in the case of a supply shock, as the central bank faces a trade-off between the two objectives. Therefore, all of the statements A, B, and C are correct, making D the correct choice.

When a Temporary Negative Supply Shock Hits the Economy,then in the Short-Run