Which of the following would be classified as a negative supply shock?
A) An increase in the legal minimum wage
B) A decrease in the price of oil
C) An increase in government purchases
D) An increase in demand for exports

Question

Quizplus · Accepted Answer

A negative supply shock is an event that causes a sudden decrease in the supply of goods and services that leads to an increase in their prices. An increase in the legal minimum wage would raise the costs of labor for firms, reducing their profitability and discouraging them from hiring workers or producing as much output as before. As a result, this would lead to a decrease in the aggregate supply, shifting the supply curve to the left and causing prices to rise. This would be classified as a negative supply shock.

B) A decrease in the price of oil would increase the profits of oil-producing firms, lower production costs for oil users, and stimulate economic activity, leading to an increase in the aggregate supply. This would be classified as a positive supply shock.

C) An increase in government purchases would increase the demand for goods and services, stimulating economic activity, but it does not affect the supply side of the economy. Therefore, it is not classified as a supply shock.

D) An increase in demand for exports would increase the demand for domestic goods and services, stimulating production and employment, but it does not affect the supply side of the economy. Therefore, it is not classified as a supply shock.

Which of the Following Would Be Classified as a Negative