Final answer:
An adverse supply shock leads to a higher rate of inflation and higher unemployment due to a leftward shift of the aggregate supply curve, representing a type (3) movement on the macro model.
Step-by-step explanation:
An adverse supply shock primarily generates a type (3) movement on the macro model. In economics, an adverse supply shock is typically associated with sudden decreases in the ability to supply goods and services at a given price, such as shocks caused by natural disasters, wars, or sudden regulatory changes. This leads to a leftward shift of the aggregate supply (AS) curve, represented as a movement from AS to AS1 in economic models. Consequently, the result is an economy that experiences higher prices, or inflation, and a decrease in the real GDP, leading to potentially higher unemployment. Therefore, an adverse supply shock results in a higher rate of inflation and does not result in a lower rate of unemployment.
The reason behind this is when the supply of goods decreases while demand remains constant, prices tend to rise as the scarcity of products increases, which is inflationary. However, because of the reduced capacity to produce goods and provide services, firms may need to cut back on their workforce, thus potentially increasing unemployment rates.
For example, a sudden increase in energy prices can be seen as an adverse supply shock, making production more expensive across various industries. This leads to a decrease in the AS curve, causing the price levels to increase (inflation) and real output to fall, potentially increasing the unemployment rate as businesses try to reduce costs to cope with the higher prices of production.