Given the aggregate demand curve,an adverse supply shock would
A)increase output and the price level
B)decrease output and the price level
C)increase output and decrease the price level
D)decrease output and increase the price level
E)cause no change in output or the price level

Question

Quizplus · Accepted Answer

An adverse supply shock, such as an increase in the price of inputs or a natural disaster, would decrease the availability of goods and services in the economy, leading to a decrease in output. However, due to the reduced supply, the price level would increase as producers try to pass on their higher production costs to consumers. Therefore, the correct choice is D, which describes a decrease in output and an increase in the price level.

Given the Aggregate Demand Curve,an Adverse Supply Shock Would