Shocks to as a Only on Sras(change the cost of production) How to deal with adverse supply shock LRAS B C SRAS A SRAS AD Y
Shocks to AS ◼ Only on SRAS (change the cost of production) ◼ How to deal with adverse supply shock P Y LRAS SRAS AD Y − A SRAS’ B C
Shocks to as a When the economy suffers from adverse supply shock, policy makers have 2 choices Do nothing stagflation> back to normal 2. Increase ad to accommodate the shock → inflation
Shocks to AS ◼ When the economy suffers from adverse supply shock, policy makers have 2 choices 1. Do nothing → stagflation → back to normal 2. Increase AD to accommodate the shock → inflation