If There Is a Permanent Adverse Supply Shock

question 9

Multiple Choice

If there is a permanent adverse supply shock,

• A)the rate of inflation can be held constant if real wages are kept from falling.
• B)an extinguishing policy will produce an acceleration of inflation.
• C)the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is vertical.
• D)the natural level of real GDP will remain the same if the supply curve of labor is vertical.

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Definitions:

Moral Hazard

A situation where one party engages in risky behavior knowing that they are protected from the consequences by another party.

Adverse Selection

A situation where asymmetric information results in high-risk individuals being more likely to select into or remain in a contract designed for low-risk individuals, affecting insurance markets and other transactional relationships.

Asymmetric Information

A situation in which one party to a transaction has more or superior information compared to another.

Moral Hazard

The situation where one party is more likely to take risks because they do not bear the full consequences of those risks.