Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate.If the economy experiences a negative demand shock,the output gap will ________ and the inflation rate will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

A negative demand shock reduces aggregate demand, leading to a decrease in output and a negative output gap. This typically results in lower inflation as demand pressures on prices diminish.

Suppose the Economy Is in Equilibrium with an Output Gap