Suppose that a shock causes the aggregate demand curve to shift rightward. If the Fed does nothing,
A) eventually the short-run aggregate supply curve will shift leftward and there will be continued inflation.
B) the short-run aggregate supply curve will not shift leftward and there will be continued inflation.
C) the economy will experience a temporary reduction in employment but will eventually return to full employment.
D) output initially will exceed potential GDP, but the economy will return to potential GDP with a higher price level.

Question

Quizplus · Accepted Answer

If the Fed does nothing in response to a rightward shift in the aggregate demand curve, output will initially exceed potential GDP and there will be inflationary pressure. However, as resources become more scarce, the short-run aggregate supply curve will shift leftward, eventually causing output to return to potential GDP, but with a higher price level. This process is known as the adjustment process and can be seen in the short-run Phillips Curve.

Suppose That a Shock Causes the Aggregate Demand Curve to Shift