An adverse supply shock would cause the FE line to
A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if the shock is temporary; shift to the right if the shock is permanent.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices or a natural disaster that disrupts production, would lead to a decrease in the potential output of the economy, as firms would face higher costs and produce less. This would cause the FE (full-employment) line to shift to the left, indicating a lower level of potential output at each level of employment.

An Adverse Supply Shock Would Cause the FE Line to