If higher inflation ensues from a temporary negative supply shock,and in response,the central bank raises interest rates,then ________.
A)it is likely adopting a policy to stabilize inflation in the short run
B)short-run inflation will fluctuate around (first go higher then go lower than)the long run level of inflation
C)it will need to lower interest rates back to their original values to ensure that inflation returns to its original rate
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Raising interest rates in response to a temporary negative supply shock is a measure to stabilize inflation in the short run, acknowledging that such a policy may cause short-run inflation to fluctuate around its long-run level. Eventually, to ensure inflation returns to its original rate, the central bank will likely need to adjust interest rates back to their original values, making all the provided options correct.

If Higher Inflation Ensues from a Temporary Negative Supply Shock,and