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  • A Single Supply Shock

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    Divyang Rathi
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    A single supply shock causes the short-run aggregate supply curve to shift left, lowering output and raising prices. Without monetary accommodation, unemployment puts downward pressure on costs, shifting supply back right and restoring the original equilibrium. With accommodation, aggregate demand shifts right along with supply, maintaining full employment but at a higher overall price level.

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    A single supply shock causes the short-run aggregate supply curve to shift left, lowering output and raising prices. Without monetary accommodation, unemployment puts downward pressure on costs, shifting supply back right and restoring the original equilibrium. With accommodation, aggregate demand shifts right along with supply, maintaining full employment but at a higher overall price level.

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    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    3 views1 page

    A Single Supply Shock

    Uploaded by

    Divyang Rathi
    A single supply shock causes the short-run aggregate supply curve to shift left, lowering output and raising prices. Without monetary accommodation, unemployment puts downward pressure on costs, shifting supply back right and restoring the original equilibrium. With accommodation, aggregate demand shifts right along with supply, maintaining full employment but at a higher overall price level.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    A Single Supply Shock

    The final effect of a single supply shock depends on whether or not it is accommodated by monetary expansion. A supply shock causes the SRAS curve to shift leftward from SRAS0 to SRAS1, as shown by arrow 1. Short-run equilibrium is established at E1.

    If there is no monetary accommodation, the unemployment would exert a downward pressure on wage costs, causing the SRAS curve to shift slowly back to the right to SRAS0. Prices would fall, and output would rise, until the original equilibrium was restored at E0. If there is monetary accommodation, the AD curve shifts from AD to AD, as shown by arrow 2. This re-establishes full-employment equilibrium at E2, but with a higher price level, P2.

    GRAPH

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