If higher inflation ensues from a temporary negative supply shock,and in response,the central bank raises interest rates,then the resulting decrease in AD will return inflation back to its original level ________.
A)and no further action will be required by the central bank
B)but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level
C)but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to "undo" its original interest rate hike in order to return inflation back to its target rate
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

If the central bank raises interest rates, it will result in a decrease in AD, which will return inflation to its original level. However, this may also result in a negative output gap and short-run increases in AS. To return inflation to its target rate, the central bank will have to undo its original interest rate hike. Therefore, option C is the correct answer. Options A and B are incorrect as they do not consider the impact of short-run AS changes. Option D is also incorrect as it suggests that all possible outcomes are correct. Option E is incorrect as there is a correct answer.

If Higher Inflation Ensues from a Temporary Negative Supply Shock,and