An increase in the general level of prices in the goods and services market that is accompanied by a short-run reduction in real GDP is most likely caused by
A) an unanticipated decrease in aggregate demand.
B) an unanticipated increase in aggregate demand.
C) a favorable supply shock that shifts SRAS to the right.
D) an unfavorable supply shock that shifts SRAS to the left.

Question

Quizplus · Accepted Answer

An increase in the general level of prices in the goods and services market that is accompanied by a short-run reduction in real GDP is known as stagflation. This is typically caused by an unfavorable supply shock that shifts the short-run aggregate supply (SRAS) curve to the left, leading to both higher prices and lower output. This rules out choices A and B, which both involve demand shocks. Option C, a favorable supply shock that shifts SRAS to the right, would result in lower prices and higher output, making it an unlikely cause of stagflation. Therefore, the best choice is D.

An Increase in the General Level of Prices in the Goods