How will an adverse supply shock shift the short-run Phillips curve, and how will it change unemployment?
A) It will shift the short-run Phillips curve right and raise unemployment.
B) It will shift the short-run Phillips curve right and lower unemployment.
C) It will shift the short-run Phillips curve left and raise unemployment.
D) It will shift the short-run Phillips curve left and lower unemployment.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as an increase in oil prices or a natural disaster disrupting production, increases the costs of production for firms. As a result, firms will produce less output and hire fewer workers, causing a decrease in aggregate supply. This shift in the short-run Phillips curve to the right implies that at any given level of expected inflation, there will be higher unemployment. Therefore, the correct answer is A, it will shift the short-run Phillips curve right and raise unemployment.

How Will an Adverse Supply Shock Shift the Short-Run Phillips