Suppose the Economy Is in a Long- Run Equilibrium

question 94

Multiple Choice

Suppose the economy is in a long- run equilibrium. The AS curve now shifts upward due to a one- time increase in the price of raw materials. If the central bank validates this supply shock,

• A)an inflationary gap will be created, which will cause the AS curve to shift upward again.
• B)a recessionary gap will be created and will cause a permanent reduction of employment.
• C)the aggregate demand curve will shift up and result in a higher price level.
• D)an inflationary gap will be created with further inflation
• E)a recessionary gap will be created, which eventually causes the AS curve to shift downward.

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