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Exhibit: Supply Shock
-(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium.
A) B; C
B) B; A
C) E; D
D) D; A

Question

Use the following to answer questions :
Exhibit: Supply Shock 
-(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium.
A) B; C 
B) B; A 
C) E; D 
D) D; A

Quizplus · Accepted Answer

The drought represents a negative supply shock, which in the short run shifts the aggregate supply curve to the left, leading to higher prices and lower output, represented by point B. Over time, as the economy adjusts and the effects of the drought are mitigated, the aggregate supply curve shifts back to its original position, returning the economy to its initial equilibrium at point A.

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