Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences:

Figure A

Figure B

Figure C

Figure D

A) no change, as shown in Figure A.
B) a leftward shift of the IS curve and an output gap of -6%, as shown in Figure B.
C) an upward shift of the Phillips curve and 1% unexpected inflation, as shown in Figure C.
D) an upward shift of the MP curve and a new interest rate of 3%, as shown in Figure D.

Question

Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences:
​
Figure A
 ​
Figure B
 ​
Figure C
 ​
Figure D

A) no change, as shown in Figure A. 
B) a leftward shift of the IS curve and an output gap of -6%, as shown in Figure B. 
C) an upward shift of the Phillips curve and 1% unexpected inflation, as shown in Figure C. 
D) an upward shift of the MP curve and a new interest rate of 3%, as shown in Figure D.

Quizplus · Accepted Answer

The Answer of Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences:
​
Figure A
 ​
Figure B
 ​
Figure C
 ​
Figure D

A) no change, as shown in Figure A. 
B) a leftward shift of the IS curve and an output gap of -6%, as shown in Figure B. 
C) an upward shift of the Phillips curve and 1% unexpected inflation, as shown in Figure C. 
D) an upward shift of the MP curve and a new interest rate of 3%, as shown in Figure D.

Assume That the Economy Starts at a 0% Output Gap