Answer to Question #243154 in Macroeconomics for pearl

Question

Which of the following events would not involve a supply shock that would shift the aggregate supply curve?

(i) The Cosatu union disintegrates and the minimum wage is abolished.

(ii) African bank plc’s bad debt creates a financial crisis and that leads to reduction in money supply.

(iii) 2016 drought destroys half of the crops farmed.

(iv) A tax on sugar is levied on companies that produce sugary beverages.

Group of answer choices

Only ii and iv are correct.

Only ii is correct.

Only iii and iv are correct.

Only i and ii are correct.

Answer 1

Supply Shock: It is the event that alters the production cost, thereby, changes the production level and shifts the aggregate supply curve.

Supply shocks are of two types, i.e., adverse supply shock (in which aggregate supply curve shifts to the left) and positive supply shock (in which aggregate supply curve shifts to the right).

 

Examples of a supply shock.

• Unionization of workers, minimum wage imposition. 
• Abolishment of minimum wage. 
• Crop failure
• Imposition of taxes
• Increase in oil prices.

Hence, African bank plc’s bad debt creates a financial crisis and that leads to a reduction in the money supply would not involve a supply shock and would not shift the aggregate supply curve.

Answer: Option (B) i.e., Only ii is correct