Chapter 4R, Problem 15MCQ

To determine

To explain: The effect of a positive supply shock.

Explanation of Solution

Explanation for the correct option:

The positive supply shock leads to a rightward shift of the short-run supply curve as it increases output and decreases the price. This leads to a rightward shift of the short-run aggregate supply curve.

Explanation for incorrect options:

A positive supply shock does not lead to stagflation because stagflation occurs when there is a negative supply shock and leads to negative growth of the economy and increased inflation.

A positive supply shock does not lead to an increase in aggregate price level because the aggregate price will decrease in this situation due to an increase in output.

A positive supply shock does not lead to a recession because the situation of recession occurs due to demand shock and not due to supply shock.

The positive supply shock does not lead to an increase in the output level because, in this situation, high inflation occurs in stagflation and not in positive supply shock.

Thus, option ‘d’ is the correct answer.

Economics Concept Introduction

A positive supply shock is a situation when the supply curve shifts rightward. This leads to a decrease in the price of goods and services and an increase in the output level of the economy. Positive supply shock decreases the cost of the output of goods and services and shifts the supply curve.