A temporary adverse supply shock, such as a drought _____
A) lowers the price level and increases output.
B) lowers the price level and decreases output.
C) raises the price level and increases output.
D) raises the price level and decreases output.
E) has no effect on either the long-run or the short-run aggregate supply curves.

Question

Quizplus · Accepted Answer

A temporary adverse supply shock such as a drought would lead to a decrease in the short-run aggregate supply (SRAS) curve. This is because the quantity of output that suppliers are willing and able to produce at any given price level decreases. The decrease in supply leads to an increase in prices and a decrease in output. This is depicted as a leftward shift of the SRAS curve. In the long run, the economy may adjust and the SRAS curve may shift back to the right, but in the short run, the shock leads to a decrease in output and an increase in prices.

A Temporary Adverse Supply Shock, Such as a Drought _____