A negative shock in aggregate demand will likely result in ________.
A)a permanent change in output,unless the central bank responds by lowering interest rates
B)a permanently lower equilibrium inflation rate,unless the central bank responds by lowering interest rates
C)an eventual increase in aggregate supply for any inflation rate,if the central bank responds by lowering interest rates
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

A negative shock in aggregate demand will likely result in a decrease in output and an increase in unemployment in the short run. However, unless the central bank responds by lowering interest rates, the equilibrium inflation rate will remain permanently lower. This is because with lower aggregate demand, there is less pressure on prices, and so firms may lower their prices to maintain demand. This lowers the inflation rate in the long run.

A Negative Shock in Aggregate Demand Will Likely Result in ________