A negative supply shock often results in:
A) a leftward shift of the AD curve.
B) an increase in the aggregate price level and a decrease in aggregate output.
C) no change in the price level.
D) a drop in the unemployment level.

Question

Quizplus · Accepted Answer

A negative supply shock, such as an increase in oil prices or a natural disaster, reduces the supply of goods and services in the economy, leading to an increase in production costs and a decrease in aggregate supply. As a result, the aggregate price level increases, and the output level decreases, causing stagflation (a combination of stagnant growth and inflation). The AD curve may shift leftward as a result of decreased consumer and business spending due to the higher production costs. Unemployment may rise, rather than drop, due to the contraction in production and economic activity.

A Negative Supply Shock Often Results In