a) Using the AS-AD model, graphically illustrate and describe in words what happens to the

LONG-RUN and SHORT-RUN equilibrium level of aggregate output and inflation, when the

economy is hit by a negative (temporary) supply shock and there is NO POLICY response.

Suppose the economy is at a long-run equilibrium before it is hit by the negative supply shock.

Make sure you properly label all the axes and curves.

b) Provide a factor and explain in how a change in the factor could lead to a

negative supply shock.

c) Will the negative supply shock more likely lead to an expansion or recession in the short-run?