Final answer:
A contractionary supply shock would most likely result in higher interest rates, as it causes a decrease in aggregate supply leading to inflationary pressure. Central banks respond with contractionary monetary policy, raising interest rates to curb borrowing and align demand with the reduced supply.
Step-by-step explanation:
A contractionary supply shock would most likely result in higher interest rates. This economic condition typically arises when there is a decrease in the aggregate supply in the economy, which can occur for various reasons such as a natural disaster or a spike in production costs. It can lead to higher prices, or inflation, as the supply of goods and services contracts while demand remains the same or increases.
As a result, central banks might engage in contractionary monetary policy to counteract inflationary pressures. This policy involves raising interest rates to discourage borrowing, which in turn reduces consumer spending and investment. Consequently, the demand for goods and services falls, realigning with the lowered supply and reducing upward pressure on prices.
The reference materials describe how a contractionary monetary policy raises interest rates and leads to a leftward shift in the aggregate demand curve. While a contractionary supply shock directly affects the supply side of the economy, the result of the central bank's actions in response to such a shock would ultimately be an aim to reduce demand to meet the lower supply levels, leading to higher interest rates, among other economic adjustments.