If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be at a:
A) higher price level and lower level of output.
B) lower price level and higher level of output.
C) higher price level and higher level of output.
D) lower price level and lower level of output.

Question

Quizplus · Accepted Answer

A negative long-run supply shock will result in reduced production and higher costs, leading to a higher price level and a lower level of output in the short run. However, over time, firms will adjust and innovation and investment will occur to increase productivity and reduce costs. As a result, the economy will stabilize at a new equilibrium with a higher price level and a lower level of output than before the shock.

If a Natural Disaster Were to Cause a Negative Long-Run