Which of the following is correct if there is an adverse 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

An adverse supply shock would cause a decrease in the availability of inputs or an increase in the cost of production, leading to a leftward shift in the short-run aggregate supply curve. As a result, prices would rise (inflation) and output would decrease, causing a rightward shift in the short-run Phillips curve. Therefore, the correct answer is D, where both the short-run aggregate supply curve and the short-run Phillips curve shift left.

Which of the Following Is Correct If There Is an Adverse