A negative shock in aggregate demand will likely result in ________.
A)a permanent change in output,if the central bank responds by lowering interest rates
B)no permanent change in the 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 typically results in a temporary decrease in output and can lead to lower inflation or deflation. Central bank interventions, such as lowering interest rates, aim to counteract these effects by stimulating demand. However, these actions do not guarantee a permanent change in output (A is incorrect), nor do they ensure no permanent change in the equilibrium inflation rate without specific conditions (B is incorrect). Additionally, a central bank's response by lowering interest rates primarily affects demand rather than directly causing an increase in aggregate supply for any inflation rate (C is incorrect).

A Negative Shock in Aggregate Demand Will Likely Result in ________