Suppose that the interest rate has no effect on investment. Assume that the econ

Question

Suppose that the interest rate has no effect on investment. Assume that the economy starts at the natural level of output. Suppose there is a shock to the variable z, so that the AS curve shifts up (leftward). The natural level of output will as a result of the supply shock, but in the short run, the price level will and output will. Since Y>Y_mP>P^e, what happens to output and the price level over time? The AS curve continues to shift leftward, causing an increase in the price level and a return to the natural level of output. will shift rightward, causing a decrease in the pnee level but no change in output. Will shift rightward. causing a decrease in the price level and a return to the natural level of output. continues to shift leftward, causing further increase* in the price level but no change in output.

Explanation / Answer

The natural level of output will stay unchanged as a result of supply shock, but in the short run, the price level will increase and the output will remain constant.

The price will increase and the output will remain constant over time.

The correct answer is option D: The AS curve will continue to shift leftward, causing further increase in the price level but no changes in output.

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