Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased.We can conclude that this shock was
A)a positive AD shock.
B)a negative AD shock.
C)a positive AS shock.
D)a negative AS shock.
E)a negative technology shock.

Question

Quizplus · Accepted Answer

A decrease in the price level accompanied by an increase in real GDP suggests a positive supply-side shock, or a positive AS shock. This is because an increase in output with stable or decreasing prices can only occur when there is an increase in the availability or decrease in the cost of inputs, such as labor and capital. A positive AD shock, on the other hand, would result in both an increase in the price level and real GDP. Therefore, choices A and B can be eliminated. A negative AS shock or a negative technology shock would both result in a decrease in real GDP and an increase in the price level. Choice E can also be eliminated.

Suppose the Economy Is Hit by a Shock and We