When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then a. inflation will be lower. b. output will be at its potential. c. output will be lower. d. inflation will not change. e. both b and c.

The correct answer is (C)

Explanation:

A supply shock negatively effects the inventory stock of an item or product which leads to increase in the overall holding cost. A positive inventory shock leads to an increase in the overall inventory, while a negative shock decrease the output which leads to increase in the overall cost of goods and services. A negative shock can increase the overall prices of goods and services.

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