ECONOMICS
AGGREGATE DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
both inflation and output return to the original long-run equilibrium values.
|
|
|
inflation is permanently increased, while output returns to potential output.
|
|
|
output returns to potential output, while inflation may be higher or lower than its initial value.
|
|
|
inflation is permanently reduced, while output returns to potential output
|
Detailed explanation-1: -Here’s what will happen: As a result of the negative supply shock, output goes down, but inflation and unemployment go up. The increase in unemployment will theoretically lead to lower wages (because their is less competition for labor, so firms do not have to compete for workers with higher wages).
Detailed explanation-2: -A demand shock is a sharp, sudden change in the demand for a product or service. A positive demand shock will cause a shortage and drive the price higher, while a negative shock will lead to oversupply and a lower price.
Detailed explanation-3: -Positive demand shocks increase aggregate demand in the economy. However, increased consumption can lead to inflation if the economy is near full capacity. Negative demand shocks decrease aggregate demand in the economy because people are more inclined to save rather than consume.
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.