A negative shock in aggregate demand will likely result in ________.
A)a short run decrease in output
B)a permanently lower equilibrium inflation rate if the central bank does not respond by lowering interest rates
C)an eventual increase in aggregate supply for any inflation rate if the central bank does not respond by lowering interest rates
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

A negative shock in aggregate demand typically results in a short-run decrease in output as firms produce less in response to lower demand. If the central bank does not respond by lowering interest rates, this can lead to a permanently lower equilibrium inflation rate due to decreased demand pressures. Additionally, the negative demand shock can lead to an eventual increase in aggregate supply for any given inflation rate if the central bank does not intervene, as firms adjust their production costs and expectations over time.

A Negative Shock in Aggregate Demand Will Likely Result in ________