Question

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary​ policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both B and C.

Answer 1

The correct answer is (C)

Step-by-step explanation:

A supply shock negatively effects the inventory stock of an item or product which leads to increase in the overall holding cost. A positive inventory shock leads to an increase in the overall inventory, while a negative shock decrease the output which leads to increase in the overall cost of goods and services. A negative shock can increase the overall prices of goods and services.