Question

Some economists think that the coronavirus will imply a STRONGER DEMAND shock than supply shock. If...

Some economists think that the coronavirus will imply a STRONGER DEMAND shock than supply shock. If that is the case what would you expect to happen to inflation and output?

Group of answer choices

Inflation will go DOWN and output will stay at potential.

Inflation will go UP and output will stay at potential.

Inflation will go DOWN and output will drop below potential.

Inflation will go UP and output will drop below potential.

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Answer #1

According to many economist as we can see that demand shock can be higher than the supply shock which means there will be inflation as well and inflation will be called demand pull inflation

Demand pull inflation arises when there is excess demand in the economy as compare to supply and it causes increase in the price level and ultimately inflation will increase

but there will there will be supply shock as well which causes the output to drop below potential level

Hence the correct answer is option D

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