An adverse aggregate supply shock
A) automatically shifts the aggregate demand curve rightward.
B) causes the Phillips Curve to shift leftward and downward.
C) can be caused by a boost in the rate of growth of productivity.
D) can cause stagﬂation.

Question

Quizplus · Accepted Answer

An adverse aggregate supply shock can cause stagflation, which is a combination of high inflation and high unemployment. This is because the shock creates higher input costs for firms, leading them to produce less and raise their prices. As a result, there is a decrease in output and an increase in prices, leading to both inflation and unemployment. A boost in the rate of productivity growth, as mentioned in choice C, would be a positive aggregate supply shock, leading to an increase in output and a decrease in prices. Therefore, it is not a correct answer for this question. Choice A is also not correct because an adverse aggregate supply shock would shift the aggregate supply curve leftward, not the aggregate demand curve rightward. Choice B is partially correct, as the Phillips Curve would shift leftward due to higher inflation, but it would shift upward rather than downward due to higher unemployment.

An Adverse Aggregate Supply Shock