Suppose That There Is a Negative Aggregate Demand Shock and the Central

question 14

Multiple Choice

Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible,then

• A)the public's expected inflation will remain unchanged.
• B)the short-run aggregate supply curve will rise.
• C)over time inflation will fall.
• D)all of the above.
• E)both A and C.

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Definitions:

Quantity Equation

The quantity equation relates the quantity of money in an economy to the nominal value of economic transactions, serving as a foundation for theories on money supply and price levels.

Real Income

The income of an individual or group after taking into consideration the effects of inflation on purchasing power.

Monetary Neutrality

The concept that changes in the money supply only affect nominal variables in the economy (such as prices, wages, and exchange rates) in the long term, without affecting real variables (like employment and real GDP).

Long Run

A period in which all factors of production and costs are variable, allowing firms to adjust to new conditions or markets.