Question

In what way is a permanent negative supply shock worse than a temporary negative supply shock?

Short answer

The temporary negative supply shock is worse than the permanent negative supply shock.

Step-by-step solution

Step 1. Introduction

Inflation is defined as a steady increase in the prices of goods and services within an economy over a set period of time.

Step 2. Explanation

Due to the constant negative supply shock, inflation and output in the economy tend to fluctuate, with the former increasing and the latter decreasing. Inflation will rise and output will fall as a result of the transitory negative supply shock. Because the long-term effect of a permanent negative supply shock on inflation and output is permanent, the economy returns to long-run equilibrium with the help of self-correcting mechanisms. As a result, both inflation and output return to where they were previously.

Step 3. Conclusion

Hence, the temporary negative supply shock is worse than the permanent negative supply shock.