A negative supply shock in the short run causes
A)the aggregate supply curve to shift to the left.
B)the price level to fall.
C)unemployment to fall.
D)equilibrium real GDP to rise.
E)potential GDP to rise.

Question

Quizplus · Accepted Answer

A negative supply shock, such as an increase in input prices or a decrease in productivity, causes a decrease in aggregate supply in the short run, resulting in a leftward shift of the aggregate supply curve. This leads to a higher price level and lower output, which often leads to higher unemployment. Equilibrium real GDP would not rise as a result. Potential GDP may be affected in the long run if the shock changes the economy's structural characteristics.

A Negative Supply Shock in the Short Run Causes