The "direct effect" of an adverse supply shock in the SP/LP model is
A)a rightward shift of LP.
B)a leftward shift of LP.
C)an upward shift of SP.
D)a downward shift of SP.

Question

Quizplus · Accepted Answer

An adverse supply shock will cause an increase in the cost of production, which will decrease the profitability of firms and decrease their incentive to produce at any given price level. This will result in a leftward shift of the LP curve in the SP/LP model, representing a decrease in the quantity of output supplied at any given price level.

The "Direct Effect" of an Adverse Supply Shock in the SP/LP