An adverse supply shock could increase both the price level and nominal GDP.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as an increase in the cost of raw materials or a decrease in productivity, can cause a decrease in the supply of goods and services. This leads to higher prices for these goods and services, causing an increase in the price level. However, at the same time, firms may also increase their selling prices, which could lead to an increase in nominal GDP. Thus, both the price level and nominal GDP could increase in response to an adverse supply shock.

An Adverse Supply Shock Could Increase Both the Price Level