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Consider an economy that is initially at a long run equilibrium. The economy is then hit with an unfavourable temporary AS shock. Which of the
Consider an economy that is initially at a long run equilibrium. The economy is then hit with an unfavourable temporary AS shock. Which of the following statements are true: a. The economy experiences a contractionary output gap. If policymakers use fiscal policy to eliminate the contractionary output gap, output will equal potential but at the cost of lower inflation. b. The economy experiences a contractionary output gap. If policymakers use fiscal policy to eliminate the contractionary output gap, output will equal potential but at the cost of higher inflation. c. If policymakers take no action inflation will decrease back to its level prior to the AS shock in the long run, but there will be a period of unemployment in the meantime. d. If policymakers take no action, output will remain permanently below potential. e. Both B and C are correct
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