Question
Question 54
suppose the conomy is initially in lang-run equilibrium and then it experiences a supply shock in the form of sharply higher
enery prices. Which of the following is true?
The short-run aggregate supply curve does not shift and the long-run aggregate
supply curve shifts rightward.
The short-run aggregate supply curve shifts rightward and there is a movement
along the aggregate demand curve.
The short-run aggregate supply curve shifts leftward and there is a movement along
the aggregate demand curve.
The short-run aggregate supply curve shifts leftward and the long-run supply curve
shifts rightward.
The short-run aggregate supply curve shifts rightward but the long-run aggregate
supply curve does not shift.
suppose the conomy is initially in lang-run equilibrium and then it experiences a supply shock in the form of sharply higher
enery prices. Which of the following is true?
The short-run aggregate supply curve does not shift and the long-run aggregate
supply curve shifts rightward.
The short-run aggregate supply curve shifts rightward and there is a movement
along the aggregate demand curve.
The short-run aggregate supply curve shifts leftward and there is a movement along
the aggregate demand curve.
The short-run aggregate supply curve shifts leftward and the long-run supply curve
shifts rightward.
The short-run aggregate supply curve shifts rightward but the long-run aggregate
supply curve does not shift.
Ask by Lawson Salazar. in Cayman Islands
Mar 31,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
The short-run aggregate supply curve shifts leftward, and there is a movement along the aggregate demand curve.
Solution
-
Initially, the economy is in long‐run equilibrium. This means that the economy is operating at potential output with the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves in their equilibrium positions.
-
A supply shock in the form of sharply higher energy prices raises production costs for businesses. Because energy is an important input in many production processes, higher energy prices increase the overall costs and reduce the quantity of goods and services that firms are willing to supply at every price level.
-
In the short run, the increased production costs shift the SRAS curve to the left. This is because, at any given price level, firms supply less when their costs increase.
-
The aggregate demand (AD) curve remains unchanged; however, the leftward shift of the SRAS curve results in a new equilibrium that is characterized by a higher price level and a lower level of real output. In moving from the initial equilibrium to the new one, the economy experiences a movement along the AD curve.
-
The LRAS curve, which represents potential output determined by factors such as technology and resources, does not shift as a result of a temporary supply shock like higher energy prices. In the long run, if the shock is temporary, the economy assumes that input prices eventually adjust and returns to potential output, but the immediate effect is on the SRAS only.
Thus, the correct statement is:
- The short-run aggregate supply curve shifts leftward and there is a movement along the aggregate demand curve.
In equation form, the leftward shift in the SRAS implies that at each
Answered by UpStudy AI and reviewed by a Professional Tutor
Like
error msg
Explain 
Simplify this solution Bonus Knowledge
When a supply shock occurs due to sharply higher energy prices, the cost of production for many businesses increases, leading to a decrease in the short-run aggregate supply (SRAS). Thus, the SRAS curve shifts leftward, indicating reduced output at every price level. This shift results in higher prices and an adjustment along the aggregate demand curve as consumers react to the altered economic landscape.
In economic history, similar shocks have had profound impacts, like the 1970s oil crisis, where skyrocketing oil prices led to persistent inflation and economic stagnation, coining the term “stagflation.” This illustrates how significant rises in energy costs can disrupt long-run equilibrium and shift economic dynamics in unintended ways.
