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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Definitions:

Hippocampus

A crucial part of the brain involved in memory formation and spatial navigation.

Receny Effect

The tendency to remember and give greater importance to the most recently presented information over older information.

Primacy Effect

A cognitive phenomenon where items or information presented first are remembered better than those presented later.

Short-term Memory Capacity

The amount of information that can be held in the short-term memory for a brief period, typically regarded as lasting 20 to 30 seconds.