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Figure: Negative Supply Shock
-(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.Taking the economy back to the LRAS curve would require:
A) a monetary expansion of 21%.
B) an inflation rate much greater than 16%.
C) an inflation rate of 16%.
D) an unemployment rate of -2%.

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Figure: Negative Supply Shock 
-(Figure: Negative Supply Shock)Refer to the figure.This economy initially begins at point A and a negative supply shock takes it to point Y.Taking the economy back to the LRAS curve would require:
A) a monetary expansion of 21%. 
B) an inflation rate much greater than 16%. 
C) an inflation rate of 16%. 
D) an unemployment rate of -2%.

Quizplus · Accepted Answer

A negative supply shock increases prices and reduces output, moving the economy from point A to Y. To return to the Long-Run Aggregate Supply (LRAS) curve and original output level, the economy would need to experience an inflation rate much greater than 16%, as the shock has already increased prices significantly.

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