How will an adverse supply shock shift the short-run Phillips curve, and how does inflation change?
A) It will shift the short-run Phillips curve right, and inflation will rise.
B) It will shift the short-run Phillips curve right, and inflation will fall.
C) It will shift the short-run Phillips curve left, and inflation will rise.
D) It will shift the short-run Phillips curve left, and inflation will fall.

Question

Quizplus · Accepted Answer

An adverse supply shock reduces the availability of goods and services, causing an increase in their prices. This leads to higher costs for firms, which lowers their ability to produce output at a given price level. As a result, the short-run Phillips curve shifts to the right, indicating a higher level of inflation at any given level of unemployment. Therefore, the correct choice is A, which states that the short-run Phillips curve shifts right, and inflation rises.

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