If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output,then

Question

Quizplus · Accepted Answer

A permanent negative supply shock resulting from an increase in regulations will cause potential output to fall, therefore option A is correct. As a result of this, the long-run aggregate supply curve will shift leftward, which is option B. Additionally, in the short-run, the reduction in potential output may cause firms to increase their input costs, leading to a shift upward in the short-run aggregate supply curve, option C. Therefore, all of the above options are correct.

If the Economy Suffers a Permanent Negative Supply Shock Because