Final answer:
A negative inflation shock such as a sharp rise in oil prices can lead to rising inflation, reduced purchasing power and higher unemployment, which may result in stagflation.
Step-by-step explanation:
In the short run, a negative inflation shock such as a sharp rise in oil prices would produce several economic effects. These would include likely outcomes such as rising inflation, given that oil is a key input for many production processes and affects the cost of goods and services across the economy.
Inflation can also lead to a reduction in purchasing power as households and businesses need to spend more on energy and may cut back on other expenditures. Additionally, a negative inflation shock can lead to higher unemployment, as businesses may reduce hiring or lay off workers in response to increased costs and decreased consumer spending.
This scenario can also induce a state of stagflation, which is characterized by a stagnant economy combined with high unemployment and inflation.