If a natural disaster were to cause a negative long-run supply shock to the economy,once the economy adjusts,the new equilibrium will be:
A)at a higher price level and lower level of output.
B)at a lower price level and higher level of output.
C)at a higher price level and higher level of output.
D)at a lower price level and lower level of output.

Question

Quizplus · Accepted Answer

A negative supply shock caused by a natural disaster will result in a decrease in the economy's productive capacity. As a result, the price level will increase due to the decrease in output while the output level will decrease in the long run equilibrium. Therefore, the correct choice is A, at a higher price level and lower level of output.

If a Natural Disaster Were to Cause a Negative Long-Run