As a result of a positive shock to $\vec { C }$ :
A) inflation and output growth increase in the short run,but in the long run they return to the rates before the shock.
B) inflation and output growth decrease in the short run,but in the long run they return to the rates before the shock.
C) inflation increases and output growth decreases in the short run,but in the long run they return to the rates before the shock.
D) inflation and output growth increase in both the short run and the long run.

Question

Quizplus · Accepted Answer

A positive shock to consumption ($\vec { C }$) means that people are consuming more, which leads to an increase in demand for goods and services. In the short run, firms will respond to this increase in demand by producing more, leading to an increase in output growth. However, as firms try to keep up with the increase in demand, they may start raising prices, leading to an increase in inflation. In the long run, however, the increase in prices will lead to an increase in the cost of production, which will eventually lead to a decrease in output growth and a decrease in inflation, returning them to the rates before the shock. Therefore, option A is the best choice.

As a Result of a Positive Shock To C⃗\vec { C }C

As a Result of a Positive Shock To $\vec { C }$