If there is an adverse supply shock, what will most likely happen?
A) The aggregate supply curve and the short-run Phillips curve will both shift right.
B) The aggregate supply curve and the short-run Phillips curve will both shift left.
C) The aggregate supply curve will shift right, and the short-run Phillips curve will shift left.
D) The aggregate supply curve will shift left, and the short-run Phillips curve will shift right.

Question

Quizplus · Accepted Answer

An adverse supply shock is an unexpected and sudden decrease in the availability of key inputs, such as a natural disaster that destroys crops or a sudden increase in the price of oil. This would cause the aggregate supply curve to shift to the left as the cost of production for firms increases. As a result, the short-run Phillips curve would shift right as there is an inverse relationship between unemployment and inflation in the short-run. Therefore, the correct choice is D.

If There Is an Adverse Supply Shock, What Will Most