Suppose an economy's aggregate price level increases and its aggregate level of real GDP decreases. This could arise from a _____ shock.

Question

Quizplus · Accepted Answer

A decrease in aggregate level of real GDP is a characteristic of a negative supply shock. An increase in the aggregate price level is also consistent with a negative supply shock, as producers face higher costs and pass some of them on to consumers in the form of higher prices. Positive demand shocks, on the other hand, are associated with higher output and higher prices, while negative demand shocks lead to lower output and potentially lower prices. Positive supply shocks would also lead to higher output and potentially lower prices.

Suppose an Economy's Aggregate Price Level Increases and Its Aggregate