Suppose that the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000
,current inflation ( )equals 0.06 (6%),and potential output (Y*)equals 19,200.If,starting from long-run equilibrium,an inflation shock raises inflation to 8%,in the short run,output will equal ________ and,in the long run,output will equal _________
A) 18,400;18,400
B) 18,400;19,200
C) 19,200;18,400
D) 19,200;19,200
E) 19,600;19,200

Question

Suppose that the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000 
,current inflation (  )equals 0.06 (6%),and potential output (Y*)equals 19,200.If,starting from long-run equilibrium,an inflation shock raises inflation to 8%,in the short run,output will equal ________ and,in the long run,output will equal _________
A) 18,400;18,400 
B) 18,400;19,200 
C) 19,200;18,400 
D) 19,200;19,200 
E) 19,600;19,200

Quizplus · Accepted Answer

In the short run, we can use the AD-AS model to determine output. With an inflation shock, the AD curve shifts to the right, and intersects with the original AS curve at a higher price level. The new equilibrium output can be found by solving for Y in the AD equation at the new price level (given by the inflation shock):
Y = 20,000 - 20,000(0.08) = 18,400
Thus, in the short run, output will equal 18,400.
In the long run, the economy will adjust back to potential output (Y*), which is given as 19,200 in this case. This is because in the long run, prices and wages are flexible and adjust to changes in demand and supply. Therefore, the answer is B (18,400 in the short run and 19,200 in the long run).

Suppose That the Aggregate Demand (ADI)curve in an Economy Is