Classify the following situation as a supply or demand shock: Households and fir
ID: 2440054 • Letter: C
Question
Classify the following situation as a supply or demand shock: Households and firms become more optimistic about the economy. O A. A negative demand shock. O B. A positive (temporary) supply shock. O C. A positive demand shock 0 D. A negative (temporary) supply shock. Determine the effects on inflation and output in the short run and the long run using AD/AS graph analysis. In the short run, output ? | and inflation ?1 . In the long run, output | ?I to potential and inflation Which of the following graphs illustrates your previous answer? Graph A Graph B Graph C Graph D LRAS AS, AS2 LRAS AS LRAS AS2 AS2 AS, AS, ADi AD AD Y, Y Y. Y A. Graph B. O B. Graph A. O C. Graph D. O D. Graph C.Explanation / Answer
Ans is A
When household and firms become more optimistic then there will be increase in demand and thus demand shock is positive.
In the short run, output will increase and inflation also increases. In long run output will be equal to potential output and inflation will be even higher/more.
Graph B is the correct one.