Question

an adverse supply shock hits the economy and the government and the fed do nothing to accomodate (fight) this shock. what happens in the short run and in the long run? a. in the sr, output falls and in the lr output returns to its original position b. both in the sr and in the lr, output is lower c. in the sr, output falls and in the lr output is higher than in the original position d. in the sr, output increases and in the lr output returns to its original position

Answer 1

In the short run, output falls and unemployment rises due to an adverse supply shock, but in the long run, the economy is expected to rebound to potential GDP as the labor market adjusts wages and employment levels.

Step-by-step explanation:

When an adverse supply shock hits the economy and the government and Federal Reserve do nothing to accommodate this shock, the short-term and long-term effects on the economy will depend on the adjustments in the labor market and overall economic flexibility. In the short run, the economy will experience a fall in output and an increase in unemployment due to the shift of the short-run aggregate supply (SRAS) curve to the left.

However, over the long run, according to neoclassical economics, the economy is expected to return to its potential output as wages and prices adjust to the new equilibrium. Employers might hold down wages or hire workers willing to accept lower wages, leading to a rightward shift in the SRAS curve, which will ultimately facilitate the return of output to its full employment level at the long-run aggregate supply (LRAS) curve, despite the lower price levels.