Assuming a constant level of aggregate demand,what is included in the short-run effects of an adverse supply shock?
A)a decrease in the price level and a decrease in real output
B)an increase in the price level and an increase in real output
C)a decrease in the price level and an increase in real output
D)an increase in the price level and a decrease in real output

Question

Quizplus · Accepted Answer

An adverse supply shock leads to a decrease in the availability of inputs, leading to a decrease in aggregate supply. Assuming a constant level of aggregate demand, the decrease in aggregate supply will lead to an increase in the price level as businesses try to pass on higher production costs to consumers. However, the decrease in aggregate supply also leads to a decrease in real output as businesses cut back on production due to the higher costs of inputs. Therefore, choice D is the best answer.

Assuming a Constant Level of Aggregate Demand,what Is Included in the Short-Run