Negative supply shocks cause shifts in:
A) only the short-run aggregate supply curve.
B) the dynamic aggregate demand curve.
C) the monetary policy reaction curve but only if policymakers do not change their inflation target.
D) the short-run aggregate supply curve and, possibly, the long-run aggregate supply curve.

Question

Quizplus · Accepted Answer

Negative supply shocks, such as an increase in the cost of production or a decrease in the availability of resources, will cause a shift in the short-run aggregate supply (SRAS) curve to the left, as firms face higher costs and are willing to produce less output at any given price level. This will lead to higher prices and lower output in the short run. In some cases, negative supply shocks can also affect the long-run aggregate supply (LRAS) curve, if they have a persistent impact on the economy's ability to produce goods and services. Specifically, if the negative supply shock reduces the potential output of the economy (e.g. if it damages the capital stock or reduces the size of the workforce), then the LRAS curve will shift to the left as well. However, if the shock is temporary and does not affect the economy's underlying productive capacity, then the LRAS curve will remain unchanged. Since negative supply shocks do not affect the demand side of the economy, they do not cause shifts in the dynamic aggregate demand curve or the monetary policy reaction curve.

Negative Supply Shocks Cause Shifts In