Given an adverse supply shock, an "accommodating policy" will. A favorable supply shock will cause:a. unemployment to rise and the short-run Phillips curve to shift right.b. In this case, the shift of the short-run Phillips curve to the right corresponds to a shift of the upward-sloping AS-curve to the left. There is thus inflation with recession known as stagflation. 6-31 If an adverse supply shock occurs, unemployment and inflation increase simultaneously. Thus, an adverse sup­ply shock causes both high inflation and high unemployment rate. This is called automatic adjustment process. decrease the money supply growth rate which raises the unemployment rate. QuestionQuestion Points1. Thus, adverse supply shock causes cost-puch inflation along with a reduction in the level of GNP. An adverse supply shock is often (but not always) a natural event. c. Increase in price is accompanied by higher unemployment. Thus, an adverse supply shock gives dual blow to the economy, that is, higher price and low output level. It is a type of supply shock. a. rise and the short-run Phillips curve to shift right. If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should. If there is a permanent adverse supply shock A)the rate of inflation can be held constant if real wages are kept from falling. B)an extinguishing policy will produce an acceleration of inflation. maintain the output ratio but allow inflation to increase. The recession of 1974-75 was caused by adverse supply shocks, primarily the Oil Crisis which occurred when the Arab members of the Organization of Petroleum Exporting Countries (OPEC) embargoed petroleum exports, driving up the price of oil. A reduction in GNP implies an increase in unemployment rate and occur­rence of recession. This reduces the amount of wheat in the market, which raises the price, assuming demand remains constant. One of the best examples of this situation is the oil crisis in the early 1970’s, which led to the rise of gas prices in North America and other sections of the world. Often, supply-shock inflation involves a trickle down effect that will cause changes in many sectors of the marketplace. C)the level of employment at the natural level of real GDP will remain constant only if the labor supply curve is upward sloping to the right. Refer to Figure 22-8. An adverse supply shock causes inflation to . unemployment to rise An adverse supply shock causes inflation to a. rise and the short-run Phillips curve to shift right. b. rise and the short-run Phillips curve to shift left. c. represents an adverse shock to aggregate supply. When they are confronted with an adverse shock to aggregate supply, policymakers face a difficult choice in that a. if they contract aggregate demand, the unemployment rate will increase further. An increase in money supply causes output to rise and prices also to rise. Given an adverse supply shock, a "neutral policy" will A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general.This sudden change affects the equilibrium price of the good or service or the economy's general price level.. For example, a series of severe tornados on farms in western Oklahoma can cause adverse supply shock for wheat. lower the inflation rate and the output ratio. c. fall and the short-run Phillips curve to shift right. An adverse supply shock causes output to fall and prices to rise. Refer to Figure 22-8. e. fall and the long-run Phillips curve to shift right. 9. The shift of the aggregate-supply curve from AS1 to AS2 . People eventually realize that actual inflation is less than expected inflation, so they adjust their inflationary expectations downward. 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