ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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. The answer is E. A decrease in employment.

Detailed explanation-2: -Contractionary supply shock is a negative supply shock, which reduces production. As all negative supplies shocks, it has occurred by an unforeseen event that caused damage to a supply chain thus it will increase prices. Therefore, we can conclude that contractionary supply shock will increase prices.

Detailed explanation-3: -An unexpected change in the economy will shift either the aggregate demand (AD) or short-run aggregate supply (SRAS) curve. Negative shocks decrease output and increase unemployment. Positive shocks increase production and reduce unemployment.

Detailed explanation-4: -Step 1: A favorable supply shock will cause unemployment to rise and the short-run Phillips curve to shift right. Step 2: As unemployment rises, wages will also rise, leading to a decrease in demand for labor and a fall in unemployment. This will lead to a further rightward shift in the short-run Phillips curve.

Detailed explanation-5: -Key Takeaways. A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price. A positive supply shock increases output, causing prices to decrease, while a negative supply shock decreases output, causing prices to increase.