A temporary supply shock,such as a bumper crop,would
A)shift the FE line to the right and leave the IS curve unchanged.
B)shift the FE line to the left and shift the IS curve up.
C)shift the FE line to the left and leave the IS curve unchanged.
D)have no effect on the FE line.

Question

Quizplus · Accepted Answer

A temporary supply shock, such as a bumper crop, is a positive event for the economy as it results in an increase in the output that the economy can produce. This increase in potential output will shift the FE (full employment) line to the right, indicating that the economy can now produce more at any given level of employment. However, since the IS (investment-saving) curve represents the equilibrium in the goods and services market, it remains unchanged as a supply shock does not directly affect the demand for goods and services.

A Temporary Supply Shock,such as a Bumper Crop,would