Suppose there is an unexpected slowdown in the rate of productivity growth in th

Question

Suppose there is an unexpected slowdown in the rate of productivity growth in the economy so that forecasters consistently overestimate the growth rate of GDP. If the central bank bases its policy decisions on the consensus forecast, what would be the likely consequences for inflation assuming it maintains its existing inflation target?

Suppose, for example, the consensus forecast was for positive productivity growth so that the long-run aggregate supply curve would be expected to (Click to select - shift to the right / shift to the left / remain unchanged)while actual productivity growth was zero, resulting in (Click to select - a shift to the right / a shift to the left/ no change) in the long-run aggregate supply curve. Thinking the long-run aggregate supply curve was (Click to select- shifting to the right / shifting to the left / unchanged), the central bank’s appropriate policy response to maintain the existing inflation target would be to shift the dynamic aggregate demand curve to the (Click to select)rightleft. But given the actual behavior of the long-run aggregate supply curve, the central bank's action would lead to (Click to select - decreased / increased) inflation in the short run.

Explanation / Answer

1. Select : Shift to the right

2.Select: No change

3.Select: Shift to the right

4.Select: Increased

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