When the Economy Is Hit by a Temporary Negative Supply

question 3

Multiple Choice

When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy,then in the long run

• A)inflation will be lower.
• B)output will be at its potential.
• C)output will be lower.
• D)inflation will be unchanged.
• E)both B and D.

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Definitions:

Federal Reserve

The central banking system of the United States, responsible for setting monetary policy, regulating banks, maintaining financial stability, and providing banking services.

Inflation Rate

How quickly the average price of goods and services climbs, lessening the value of money.

Currency

The system of money in general use in a country or economic bloc, used as a medium of exchange for goods and services.

Secondary Reserves

Liquid assets that are not used as part of a firm's primary operations but can be quickly converted into cash to meet short-term liabilities.