Aggregate supply shocks cause the price level and real GDP to change in
A)the same direction with price changing by more than output.
B)the same direction and by the same amount.
C)opposite directions with price changing by less than output.
D)opposite directions and not necessarily by the same amount.
E)opposite directions but by the same amount.

Question

Quizplus · Accepted Answer

Aggregate supply shocks can affect both the price level and real GDP, but not necessarily in the same direction or by the same amount. For example, a negative supply shock, such as a sudden increase in oil prices, can cause a decrease in aggregate supply and an increase in the general price level, but also a decrease in real GDP as firms face higher production costs and reduce output. The direction and magnitude of these effects depend on the specific nature of the shock and the responsiveness of the economy. Therefore, neither options A nor B are correct. Option C suggests that price changes by less than output, which could happen if the shock is small or if there is excess capacity in the economy, but this is not a general rule. Option E suggests that price changes by the same amount as output, which is unlikely in most cases.

Aggregate Supply Shocks Cause the Price Level and Real GDP