Restoring Supply-Side Equilibrium After a Negative Supply Shock
Following a negative supply shock like an oil price increase, which shifts the price-setting (PS) curve down, the economy can only return to a supply-side equilibrium by moving to a new point (e.g., point C). This new equilibrium is located at the intersection of the wage-setting (WS) curve and the new, lower PS curve. Reaching this point requires a reduction in both the real wage and the level of employment. The adverse outcomes of lower wages and employment are why such an event is termed a 'negative' supply shock.
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Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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Learn After
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