ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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higher; in both the short and long runs
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higher; in the short run but not in the long run
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lower; in both the short and long runs
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lower; in the short run but not in the long run
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Detailed explanation-1: -A permanent negative supply shock leads to higher real interest rates in both the short and the long run. It also results in lower output in both the long and the short run, and higher inflation in both the short and the long run.
Detailed explanation-2: -In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level.
Detailed explanation-3: -An unexpected change in the economy will shift either the aggregate demand (AD) or short-run aggregate supply (SRAS) curve. Negative shocks decrease output and increase unemployment. Positive shocks increase production and reduce unemployment.
Detailed explanation-4: -Answer and Explanation: The inflation will increase and output decrease in both the short and long run of supply shocks. The permanent negative supply shock is worse than temporary because, in permanent negative supply shock, the inflation is permanent and will affect the output in the long run.
Detailed explanation-5: -A permanent negative supply shock causes the SRAS curve to move leftwards and hampers economic growth. A negative supply shock (like a drought or hike in oil price) would decrease the economy’s overall production, and the SRAS curve moves leftwards.