An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.

Question

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An adverse supply shock, such as an increase in oil prices, makes production more expensive, leading to higher prices and lower output. This shifts the short-run Phillips curve (which shows the trade-off between inflation and unemployment) to the right, indicating higher inflation for any level of unemployment. Simultaneously, it shifts the short-run aggregate-supply curve to the left, reflecting a decrease in the total quantity of goods and services that firms in the economy are willing to produce at any given price level.

An Adverse Supply Shock Shifts the Short-Run Phillips Curve Right