The short-run effect of a negative supply shock is
A) lower inflation and a declining output gap.
B) lower inflation and an increasing output gap.
C) higher inflation and a declining output gap.
D) higher inflation and an increasing output gap.

Question

Quizplus · Accepted Answer

A negative supply shock typically leads to higher inflation due to increased production costs and a declining output gap as output decreases.

The Short-Run Effect of a Negative Supply Shock Is