In the case of a permanent negative supply shock

Question

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A permanent negative supply shock refers to a sustained decrease in the productive capacity of an economy. This leads to a decrease in potential output in the long run, which implies a leftward shift in the long-run aggregate supply (LRAS) curve. In the short run, prices and wages may be sticky, so the economy will produce less output at higher prices. Therefore, the short-run aggregate supply (SRAS) curve will also shift leftward. Overall, both the LRAS and SRAS curves will shift leftward in the case of a permanent negative supply shock.

In the Case of a Permanent Negative Supply Shock