Question

A contractionary supply shock would most likely result in

Answer 1

Answer: The options are given below:

A. an increase in aggregate demand

B. an increase in national income

C. an increase in gross domestic product

D. decrease in the general price level

E. a decrease in employment

The answer is E. A decrease in employment.

Explanation: Contractionary Supply shock refers to a decrease in aggregate demand, thereby resulting in a decrease in both the price level and real Gross Domestic Product (GDP).

When this event occurs, the economy will enter into a recessionary gap which will lead to an underutilization of factors of production.

This will therefore lead to point whereby the demand for labor and input materials will be so low, and eventual laying off of workers, and in this situation, the workers will be willing to work for less wages and input prices will fall.

Answer 2

A decrease in employment

Step-by-step explanation:

Supply shock refers to a sudden event that changes the supply of a product or services. It could be a negative or positive shock

A negative supply shock is caused by a decrease in supply while a positive supply shock is caused by an increase in supply.

As negative supply shock reduces output causing an increase in price while a positive supply shock increases output causing a decrease in price.

NOTE: Supply shock is usually negative.

Supply shock could be contractionary or expansionary.

•A contractionary supply shock will result in the decrease in employment contrary to an expansionary supply shock that will lead to an increase in employment.