If Higher Inflation Ensues from a Temporary Negative Supply Shock,and

question 8

Multiple Choice

If higher inflation ensues from a temporary negative supply shock,and in response,the central bank raises interest rates,then the resulting decrease in AD will return inflation back to its original level ________.

• A)and no further action will be required by the central bank
• B)but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level
• C)but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to "undo" its original interest rate hike in order to return inflation back to its target rate
• D)all of the above
• E)none of the above

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