A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.

Question

Quizplus · Accepted Answer

When there is a supply shock due to an increase in gasoline prices, firms face higher production costs as transportation costs increase. As a result, firms decrease their level of output, which leads to a decrease in aggregate supply (AS). This shift in AS results in an increase in equilibrium price levels and a decrease in equilibrium output levels. Therefore, there is a decrease in output and an increase in prices, which is consistent with option B.

A Supply Shock Caused by an Increase in the Price