Suppose the inflation rate is currently equal to the Reserve Bank's target and the economy is at a long run equilibrium. Then there is a significant fall in the price of imported food due to good harvests overseas, assuming the Reserve Bank keeps the inflation target unchanged, which statement best describes what happens in the short run and/or in the long run to inflation and real GDP?

Question

Answer

In the short run, inflation falls and output remains unchanged.

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In the short run, inflation rises and output increases.

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In the long run, inflation will be lower than the Reserve Bank’s target and potential output will increase.

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In the long run, inflation will be lower than the Reserve Bank’s target and output will return to potential output.

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In the long run, inflation will return to the Reserve Bank’s target and output will return to potential output.

Crowdly

Suppose the inflation rate is currently equal to the Reserve Bank's target and t...

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