If there is an adverse supply shock,then
A)unemployment rises and the short-run Phillips curve shifts right.
B)unemployment rises and the short-run Phillips curve shifts left.
C)unemployment falls and the short-run Phillips curve shifts right.
D)unemployment falls and the short-run Phillips curve shifts left.

Question

Quizplus · Accepted Answer

An adverse supply shock, for example an increase in oil prices, increases production costs and reduces the profitability of firms. As a result, firms decrease their production and may even lay off workers, causing unemployment to rise. This increase in unemployment shifts the short-run Phillips curve rightwards, indicating that inflation and unemployment are positively related in the short-run. Therefore, choice A is correct.

If There Is an Adverse Supply Shock,then