AD - AS Shocks
-On the graph above,movement from point ________ to point ________ might occur if there is a negative demand shock,followed by updating of expected inflation.
A)F;G
B)H;I
C)H;F
D)F;H
E)none of the above

Question

AD - AS Shocks 
-On the graph above,movement from point ________ to point ________ might occur if there is a negative demand shock,followed by updating of expected inflation.
A)F;G 
B)H;I 
C)H;F 
D)F;H 
E)none of the above

Quizplus · Accepted Answer

A negative demand shock would shift the aggregate demand curve to the left, resulting in a decrease in both output and price level (movement from point H to F). The subsequent updating of expected inflation would increase the short-run aggregate supply, but not enough to bring output back to its original level (movement from point F to H). Thus, the movement from point H to F to H represents the adjustment process after a negative demand shock and updating of expected inflation.