an adverse supply shock causes inflation to

raise the inflation rate and the output ratio. 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.. B)an extinguishing policy will produce an acceleration of inflation. For example, a series of severe tornados on farms in western Oklahoma can cause adverse supply shock for wheat. This reduces the amount of wheat in the market, which raises the price, assuming demand remains constant. A favorable supply shock will cause:a. unemployment to rise and the short-run Phillips curve to shift right.b. maintain the output ratio but allow inflation to increase. Thus, an adverse sup­ply shock causes both high inflation and high unemployment rate. maintain the inflation rate and the output ratio. lower the inflation rate and the output ratio. 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. decrease the money supply growth rate which raises the unemployment rate. The shift of the aggregate-supply curve from AS1 to AS2 . 6-31 If an adverse supply shock occurs, unemployment and inflation increase simultaneously. If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should. QuestionQuestion Points1. c. Since oil is used in the manufacturing of most goods and services, this was a very large supply shock. A reduction in GNP implies an increase in unemployment rate and occur­rence of recession. It is a type of supply shock. c. represents an adverse shock to aggregate supply. e. fall and the long-run Phillips curve to shift right. 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. An adverse supply shock causes inflation to a. rise and the short-run Phillips curve to shift right. This is called automatic adjustment process. Increase in price is accompanied by higher unemployment. Thus, adverse supply shock causes cost-puch inflation along with a reduction in the level of GNP. 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. Often, supply-shock inflation involves a trickle down effect that will cause changes in many sectors of the marketplace. An increase in money supply causes output to rise and prices also to rise. There is thus inflation with recession known as stagflation. An adverse supply shock causes output to fall and prices to rise. 10. 9. b. if they expand aggregate demand, the inflation rate will increase further. People eventually realize that actual inflation is less than expected inflation, so they adjust their inflationary expectations downward. c. fall and the short-run Phillips curve to shift right. Given an adverse supply shock, a "neutral policy" will This leads to the break-down of … Refer to Figure 22-8. An adverse supply shock is often (but not always) a natural event. d. fall and the short-run Phillips curve to shift left. Refer to Figure 22-8. b. rise and the short-run Phillips curve to shift left. An adverse supply shock causes inflation to . 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. 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