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If the price level is increasing and output is falling, which of the following could be...

If the price level is increasing and output is falling, which of the following could be the reason?

a) a positive demand shock

b) a negative supply shock

c) a negative demand shock

d) a positive supply shock

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Answer #1

Option b

b) a negative supply shock

A negative supply shock increases input prices and shifts SRAS curve to the left which increases prices and decreases real output.

A positive supply shock decreases input prices and increases aggregate supply which shifts SRAS to right and increases real output and decreases price level.

A positive demand shock increases AD and shifts AD to the right which increases both price level and real output.

A negative supply shock decreases AD and shifts to the left which decreases both the price level and real GDP.

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