There is a temporary demand shock . In the short run, immediately following this shock, output and inflation are given by:

Question

There is a temporary demand shock .  In the short run, immediately following this shock, output and inflation are given by:

BlackTom AI · Accepted Answer

The question asks about the short-run effects on output and inflation immediately after a temporary demand shock.
Option analyzed: Y=0.975,π=−0.005
First, interpret the numbers: Y=0.975 indicates output is 2.5% below the baseline (a negative output gap). π=−0.005 indicates inflation is negative, i.e., a deflation of 0.5%. These signs are consistent with a sudden drop in demand where aggregate demand weakens and prices adjust downward or slowly, producing lower output and lower (possibly negative) inflation in the short run.
In many macro models with sticky prices or wage frictions, a temporary demand shock lowers real activity and reduces inflation pressures in the near term. Firms face softer demand, may reduce prices or postpone price increases, and production falls until demand recovers. This aligns with the intuition that a demand shock depresses both output and the price level in the short run.
Limitations to consider: since the problem statement provides only one option and no alternative choices to compare, we cannot contrast this result with other possible short-run paths (e.g., a scenario where inflation is unchanged or higher, or where output falls but inflation rises due to supply-side constraints). Also, the exact magnitudes (2.5% output gap and 0.5% deflation) depend on the model specifics, such as the degree of price rigidity, the responsiveness of inflation to demand, and the monetary reaction function.
In sum, viewed through the lens of a temporary demand shock in the short run, a negative output gap accompanied by deflation (Y<1, π<0) is a plausible outcome, and the given numbers reflect that intuitive story.

ECON10003_2025_SM1 Pre-Tutorial Quiz 6

There is a temporary demand shock . In the short run, immediately following this shock, output and inflation are given by:

View Explanation

Log in for full answers

Similar Questions

In a competitive market, what typically happens when there is a demand shock?

A positive demand shock will result from:

Real Estate Boom is an example of

Great depression was an example of

Suppose the real interest rate is above the neutral real rate of interest but the economy is in an expansion. Which of the following options is consistent with these observations?

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler