In the short run an adverse supply shock causes:
A) both prices and output to rise.
B) prices to rise and output to fall.
C) prices to fall and output to rise.
D) both prices and output to fall.

Question

Quizplus · Accepted Answer

When there is an adverse supply shock, such as a decrease in the supply of oil or an increase in the price of raw materials, this will increase production costs for firms. Higher production costs lead to higher prices for consumers, thus causing inflation. As firms adjust to higher costs, they will reduce their output, leading to a decrease in the quantity of goods and services supplied. This results in higher prices and lower output, which is described in option B.

In the Short Run an Adverse Supply Shock Causes