(Figure: Shifting the AD and SRAS) Assume the economy depicted in the figure is in long-run equilibrium, where the aggregate demand curve is AD₀ and the short-run aggregate supply curve is SRAS_0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____.

Question

Quizplus · Accepted Answer

A supply shock, such as an increase in oil prices, would cause a leftward shift in the short-run aggregate supply curve (SRAS) from SRASS1U1B10 to SRASS1U1B12, resulting in a movement to a short-run equilibrium at point a, where aggregate demand (AD) intersects the new SRAS curve. The new long-run equilibrium would occur at point A, with a lower level of output and a higher price level compared to the previous long-run equilibrium. Therefore, choice D is the best choice.

(Figure: Shifting the AD and SRAS) Assume the Economy