Thus, an adverse supply shock gives dual blow to the economy, that is, higher price and low output level. Refer to Figure 22-8. c. A reduction in GNP implies an increase in unemployment rate and occur­rence of recession. b. rise and the short-run Phillips curve to shift left. An increase in money supply causes output to rise and prices also to rise. b. if they expand aggregate demand, the inflation rate will increase further. If there is a permanent adverse supply shock A)the rate of inflation can be held constant if real wages are kept from falling. This leads to the break-down of … An adverse supply shock causes inflation to . An adverse supply shock causes output to fall and prices to rise. d. fall and the short-run Phillips curve to shift left. An adverse supply shock is often (but not always) a natural event. An adverse supply shock causes inflation to a. rise and the short-run Phillips curve to shift right. Thus, an adverse sup­ply shock causes both high inflation and high unemployment rate. The shift of the aggregate-supply curve from AS1 to AS2 . A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general.This sudden change affects the equilibrium price of the good or service or the economy's general price level.. decrease the money supply growth rate which raises the unemployment rate. One of the best examples of this situation is the oil crisis in the early 1970’s, which led to the rise of gas prices in North America and other sections of the world. 6-31 If an adverse supply shock occurs, unemployment and inflation increase simultaneously. When they are confronted with an adverse shock to aggregate supply, policymakers face a difficult choice in that a. if they contract aggregate demand, the unemployment rate will increase further. This is called automatic adjustment process. Often, supply-shock inflation involves a trickle down effect that will cause changes in many sectors of the marketplace. Thus, adverse supply shock causes cost-puch inflation along with a reduction in the level of GNP. Refer to Figure 22-8. B)an extinguishing policy will produce an acceleration of inflation. c. represents an adverse shock to aggregate supply. 10. A favorable supply shock will cause:a. unemployment to rise and the short-run Phillips curve to shift right.b. maintain the inflation rate and the output ratio. 9. raise the inflation rate and the output ratio. This reduces the amount of wheat in the market, which raises the price, assuming demand remains constant. For example, a series of severe tornados on farms in western Oklahoma can cause adverse supply shock for wheat. Given an adverse supply shock, an "accommodating policy" will. The recession of 1974-75 was caused by adverse supply shocks, primarily the Oil Crisis which occurred when the Arab members of the Organization of Petroleum Exporting Countries (OPEC) embargoed petroleum exports, driving up the price of oil. Given an adverse supply shock, a "neutral policy" will In this case, the shift of the short-run Phillips curve to the right corresponds to a shift of the upward-sloping AS-curve to the left. C)the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is upward sloping to the right. lower the inflation rate and the output ratio. Since oil is used in the manufacturing of most goods and services, this was a very large supply shock. People eventually realize that actual inflation is less than expected inflation, so they adjust their inflationary expectations downward. There is thus inflation with recession known as stagflation. 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