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If a Negative Supply Shock Is Associated with a Decline

Question 27

Multiple Choice

If a negative supply shock is associated with a decline in potential output, keeping inflation at its target requires:


A) A leftward shift in the monetary policy reaction curve because there is an expansionary gap
B) A rightward shift in the monetary policy reaction curve because there is an expansionary gap
C) A leftward shift in the monetary policy reaction curve because there is a recessionary gap
D) A rightward shift in the monetary policy reaction curve because there is an recessionary gap

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