Supply Shock Shifts SRAS Leftward

Steps:

• Shortage of raw materials increases input costs for firms.
• Higher costs reduce short-run aggregate supply, shifting SRAS curve left.
• New intersection of AD and shifted SRAS occurs at higher price level and lower real GDP.
• This stagflation equilibrium matches point B on the diagram.

Why B is correct:

• Negative supply shock, per AS-AD model, raises prices and cuts output via leftward SRAS shift.

Why the others are wrong:

• A: Shows demand expansion (rightward AD shift), increasing output and prices.
• C: Indicates demand contraction (leftward AD shift), lowering both output and prices.
• D: Represents long-run adjustment (vertical LRAS), restoring full employment without persistent inflation.

Final answer: B