Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices.How will the short-run and long-run aggregate supply curves be affected?

Question

Quizplus · Accepted Answer

A supply shock in the form of higher energy prices will increase production costs and decrease short-run aggregate supply. However, in the long run, wages and prices will adjust, causing the long-run aggregate supply curve to remain unchanged. Therefore, the short-run aggregate supply curve shifts leftward, but the long-run aggregate supply curve does not shift.

Suppose the Economy Is Initially in Long-Run Equilibrium and Then