Question

For aggregate demand shocks and permanent supply shocks, the price stability and economic activity stability objectives are consistent: Stabilizing inflation stabilizes economic activity, even in the short run. For temporary supply shocks, however, there is a trade-off between stabilizing inflation and stabilizing economic activity in the short run. In the long run, however, there is no conflict between stabilizing inflation and stabilizing economic activity.

Short answer

The inflation differential is negative.

Step-by-step solution

Step 1. Concept of Inflation 

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

Step 2. Explanation

When an economy's current inflation rate is lower than its goal inflation rate, the inflation gap is negative. When the total increase in commodity prices is less than the expected rise, inflation is said to be negative.