Suppose the short-run AS curve is given by: π(t) = π(t-1) + ε(t) If there is a temporary (one-period) favourable inflation shock (ε < 0), in the short-run;   A

Suppose the short-run AS curve is given by:

π(t) = π(t-1) + ε(t)

If there is a temporary (one-period) favourable inflation shock (ε < 0), in the short-run;

A. The inflation rate will increase for one-period and then immediately return to its pre-shock value.

B. The inflation rate will decrease for one-period and then immediately return to its pre-shock value.

C. The inflation rate will increase when the shock occurs and remain at a new higher level

D. The inflation rate will decrease when the shock occurs and remain at a new lower level

E. None of the above