Which of the following is correct if there is a favorable supply shock?
A)the short-run aggregate supply curve and the short-run Phillips curve both shift right.
B)the short-run aggregate supply curve and the short-run Phillips curve both shift left.
C)the short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
D)the short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.

Question

Quizplus · Accepted Answer

A favorable supply shock increases the aggregate supply in the short-run, causing the short-run aggregate supply curve to shift to the right. However, this can also lead to a decrease in the price level and a decrease in inflation, which causes the short-run Phillips curve to shift to the left. Therefore, option C is correct as it considers both the shifts.

Which of the Following Is Correct If There Is a Favorable