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?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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