Question

When a negative supply shock hits an economy, Choose one: A. unemployment decreases and this becomes the new long-run natural rate of unemployment. B. unemployment decreases temporarily, but returns to the natural rate of unemployment in the long run. C. unemployment increases and this becomes the new long-run natural rate of unemployment. D. unemployment increases temporarily but returns to the natural rate of unemployment in the long run.

Answer 1

Shocks are unforeseen changes that cause a shift in the aggregate demand and short-run aggregate supply curve. When a negative supply shock hits an economy;

• D. Unemployment increases temporarily but returns to the natural rate of unemployment in the long run.

When negative supply occurs, it becomes more expensive for producers to make goods perhaps due to some laws that were introduced by the government.

The effect of this on the economy could be temporary or permanent. Some economists have the notion that this shock can correct itself later especially if it is temporary.

Therefore, sentence D is an example of what can happen to an economy in the event of a negative supply shock.

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