A temporary adverse supply shock directly causes
A)a downward shift of the IS curve.
B)a shift to the left of the FE line.
C)a downward shift of the LM curve.
D)an upward shift of the IS curve.

Question

Quizplus · Accepted Answer

A temporary adverse supply shock causes a decrease in the potential output or the natural rate of output. This shift in the production function leads to a leftward shift of the FE (or LRAS) line. The IS curve and the LM curve shift in opposite directions in response to the shock, but the net effect on these curves is ambiguous, depending on the relative magnitudes of the shifts. Therefore, the correct choice is B - a shift to the left of the FE line.

A Temporary Adverse Supply Shock Directly Causes