Analyzing a Persistent Economic Shock

An economy experiences a permanent and significant increase in the global price of energy, a critical input for almost all domestic firms. Assuming no immediate policy intervention, which statement best analyzes the dual challenge this economy will face in its new long-term equilibrium?

Following a permanent adverse supply-side event that reduces an economy's productive capacity, it is possible for policymakers to eventually guide the economy back to both its original inflation rate and its original unemployment rate.

The Policymaker's Dilemma from a Supply Shock

The Economic Consequences of a Lasting Supply Shock

An economy experiences a permanent negative supply shock, such as a lasting increase in energy costs. Arrange the following events to show the logical sequence of how the economy adjusts to a new, less favorable long-run equilibrium.

An economy experiences a persistent negative supply shock, such as a permanent increase in energy prices. Match each economic state or event with its correct description in the context of the adjustment to a new, less favorable equilibrium.

When an economy experiences a persistent negative supply shock, such as a permanent rise in energy costs, the long-run equilibrium is altered. To prevent inflation from continuously accelerating in this new equilibrium, the economy must sustain a higher rate of ______.

Evaluating Policy Responses to a Permanent Supply Shock

An economy experiences a permanent adverse supply-side event, such as the widespread adoption of a new technology that, while beneficial in the very long run, initially requires costly retooling and retraining, thus raising production costs across many sectors. What is the core dual challenge this creates for the economy's stabilization?