Starting from Long-Run Equilibrium in the Dynamic Model of Aggregate

question 83

Multiple Choice

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, output immediately decreases as a result of a one-period positive supply shock because:

• A) the central bank raises the nominal and real interest rates in response to the increase in inflation.
• B) the higher prices generate a negative demand shock that reduces output.
• C) the natural level of output falls in response to the increase in inflation.
• D) the central bank increases the target rate of inflation in response to the increase in inflation.

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