Suppose that the economy experiences an adverse supply shock when the price of an essential imported resource increases. We would expect:

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An adverse supply shock, such as an increase in the price of an essential imported resource, typically leads to higher production costs. This results in a decrease in the supply of goods and services, pushing up prices (inflation) and reducing the quantity of goods and services produced (real output). Hence, the price level rises, and the level of real output decreases.

Suppose That the Economy Experiences an Adverse Supply Shock When