Question

A rise in input prices that affects many or most firms across the economy can cause the aggregate supply curve to shift back to the left creating __________.

a. Stagflation.
b. Inflation.
c. A supply surplus.
d. A supply deficit.

Answer 1

A rise in input prices affecting many firms can shift the aggregate supply curve to the left, leading to stagflation, which is characterized by economic stagnation, high unemployment, and inflation.

Step-by-step explanation:

When a rise in input prices affects many or most firms across the economy, it can cause the aggregate supply curve to shift to the left. This shift represents a decrease in aggregate supply at every price level, which in turn increases the overall price level and can lead to stagflation, a condition characterized by slow growth (or recession), high unemployment, and high inflation. This was notably observed in the 1970s when increases in oil prices led to such economic conditions.