If a Negative Supply Shock Is Associated with a Decline

question 79

Multiple Choice

If a negative supply shock is associated with a decline in potential output, policymakers need to:

• A)Raise the real interest rate by even less than they would in the case of a recessionary gap
• B)Raise the real interest rate by even more than they would in the case of a recessionary gap
• C)Raise the real interest rate by the same amount as they would in the case of a recessionary gap
• D)Not shift the monetary policy reaction curve

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Definitions:

Average Variable Cost Curve

A graphical representation showing how the average variable cost of production changes as the quantity of output changes.

Marginal Cost

The augmentation in cumulative cost resulting from the manufacture of an additional unit.

Average Total Cost

The total cost of production divided by the quantity produced, representing the average cost per unit of output.

Scones

Scones are a type of baked good, often lightly sweetened and sometimes glazed, typically made of wheat, barley or oatmeal, and baking powder, and served with tea.