An inflation shock that shifts the short-run aggregate supply curve upward means the economy's potential level of output will:
A)Increase
B)Not change
C)Decrease
D)Decrease only if monetary policymakers do not respond

Question

Quizplus · Accepted Answer

An inflation shock that shifts the short-run aggregate supply curve upward means that input prices (such as wages and materials) have increased, causing firms to produce less output at any given price level. This will result in a decrease in real GDP in the short run, but the long-run potential level of output, determined by factors such as technology and labor force growth, will not change. Therefore, the answer is B, not change.

An Inflation Shock That Shifts the Short-Run Aggregate Supply Curve