Suppose there is a temporary supply shock because of a war in the Middle East,then,ceteris paribus,the ensuing cost push shock ________.
A)would lead to a temporary increase in prices but a permanent reduction in output
B)would lead to a temporary increase in output but a permanent increase in inflation
C)would lead to a temporary decrease in output but a permanent increase in inflation
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

A temporary supply shock, such as one caused by a war in the Middle East, would typically lead to a temporary increase in prices and a temporary decrease in output, known as stagflation. However, neither the increase in prices nor the decrease in output is necessarily permanent, as economies can adjust over time through various mechanisms, such as monetary policy adjustments, shifts in supply and demand, and resolution of the initial shock. None of the provided options accurately describe the typical effects of a temporary supply shock, making E the correct choice.

Suppose There Is a Temporary Supply Shock Because of a War