Keep in mind that ademand shockis a change in the equilibrium real GDP determined by the crossing points of IS and LM curves. Asupply shockis a change in the production capacity. When the change ispositive, the shock is called favorable. When the change isnegative, the shock is called adverse. Themagnitude of a demand shockis the absolute value of the change in equilibrium real GDP, and themagnitude of a supply shockis the absolute value of the change in the production capacity.

The U.S. economy suffered major aggregate supply and demand shocks due to the COVID-19 pandemic in 2020. The demand shock was much more severe than the supply shock in the sense that in the absence of policy intervention, the short-run equilibrium real output determined by the IS-LM curves would have declined much more than the shrinkage in production capacity. If the U.S. government and the Fed had not responded to the situation with their expansionary fiscal and monetary policies, by the end of 2020

a. both inflation and GDP would have risen.

b. both inflation and GDP would have dropped.

c. inflation would have declined, but GDP would have risen.

d. inflation would have risen, but GDP would have declined.