Answer to Question #220135 in Macroeconomics for Yogesh Kumar

Question

Explain the effect of adverse supply shock on
price level and output in the following
conditions with suitable diagram:. 5
(i) When aggregate demand is held constant.
(ii) When aggregate demand can be increased

Answer 1

An adverse supply shock involves an unforeseen cost rise or production interruption. Adverse supply shock affects merchandise or product supply, leading to an unanticipated price adjustment and output changes. They can either be negative or positive adverse supply shocks. Therefore if it is a negative one, the supply of products will decrease. On the other hand, if the adverse supply shock is a positive one, it might result in increased supply.

If the aggregate demand remains constant, a positive adverse shock will lead to an increase in output, which contributes to a decrease in the prices due to a shift in the supply curve to the right. While if it is a negative supply, the output will decrease due to decreased production, resulting in increased prices due to the left's supply curve shifting to the left