When the economy experiences a permanent supply side shock that shifts the long-run aggregate supply curve to the right, the short-run aggregate supply curve will:
A) instantly shift to the left to a new long-run equilibrium.
B) shift to the left initially, and then over time be pulled rightward toward the long-run aggregate supply.
C) gradually shift to the right until it reaches long-run aggregate supply and the new long-run equilibrium.
D) None of these are true.

Question

Quizplus · Accepted Answer

When the economy experiences a permanent supply side shock that shifts the long-run aggregate supply (LRAS) curve to the right, it indicates an increase in the economy's potential output. The short-run aggregate supply (SRAS) curve will gradually adjust and shift to the right as well, moving towards the new position of the LRAS and establishing a new long-run equilibrium. This adjustment process occurs as prices and wages slowly adapt to the new economic conditions.

When the Economy Experiences a Permanent Supply Side Shock That