A favorable supply shock occurs when:
A) environmental protection laws raise costs of production.
B) the Fed increases the money supply.
C) unions push wages up.
D) an oil cartel breaks up and oil prices fall.

Question

Quizplus · Accepted Answer

A favorable supply shock occurs when the costs of production decrease, which can lead to lower prices and an increase in output. The breakup of an oil cartel and a subsequent fall in oil prices can lead to lower costs of production for many industries, making it easier for them to produce goods and services at lower prices. Therefore, D is the best choice. The other choices are unlikely to lead to a favorable supply shock; environmental protection laws and union wage increases would raise production costs, while an increase in the money supply would likely lead to inflation (i.e. higher prices), rather than a decrease.

A Favorable Supply Shock Occurs When