Question

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. Suppose that the country experiences an important crop failure due to severe tornadoes. What will be the immediate impact following the shock?

Select one:

a. the short-run aggregate supply curve shifts up, the price level rises, and output falls.

b. the price level falls, output falls, and the short-run aggregate supply curve shifts down.

c. the price level falls, output falls, but the short-run aggregate supply curve does not shift.

d. the price level stays the same, the short-run aggregate supply curve does not shift, but output falls.

Answer 1

The balance would be reached at the cross-section of the LRAS, SRAS and AD curves if the long-run supply curve for the economy is Y = 3,000, and the short-run supply curve is horizontal. Today, if a plant loss happens as a result of a natural catastrophe, the immediate consequence is a decrease in the short-term overall supply, as a result of a change to the left (up) in the SRAS curve. The supply shock can be as follows given the aggregate demand curve is downward:

Increased price ratios are increased as the supply curve is upward. The price level changes will decrease the amount requested and the overall production decreases from Y1 to Y2.

Therefore ,The right choice, is (a). the short-run aggregate supply curve shifts up, the price level rises, and output falls.