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    Question

    Within the AD-AS model, a phenomenon known as

    stagflation is best represented by a shift in which curve, and with what consequence for the short-run equilibrium?
    A Aggregate Demand (AD) shifts right, causing higher inflation and higher output. Correct Answer Incorrect Answer
    B Aggregate Demand (AD) shifts left, causing lower inflation and lower output. Correct Answer Incorrect Answer
    C Short-Run Aggregate Supply (SRAS) shifts left, causing higher inflation and lower output. Correct Answer Incorrect Answer
    D Short-Run Aggregate Supply (SRAS) shifts right, causing lower inflation and lower output. Correct Answer Incorrect Answer

    Solution

    Solution: ¡ Stagflation is characterized by the simultaneous occurrence of stagnation (falling output/GDP) and inflation (rising prices). ¡ This outcome is typically caused by a negative supply shock (e.g., a sudden increase in oil prices, wage demands, or natural disasters), which makes production more expensive at every price level. ¡ SRAS Shift: A negative supply shock shifts the Short-Run Aggregate Supply (SRAS) curve to the left. ¡ Equilibrium Effect: This shift causes the price level to rise (inflation) and the level of output to fall (stagnation/recession).

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