Import price shock shifts short-run aggregate supply left

Steps:

• Original equilibrium at X is where AD intersects AS.
• New equilibrium at Y shows higher price level and lower output, indicating leftward AS shift.
• Leftward AS results from higher production costs.
• Increase in import prices raises input costs, causing AS to shift left.

Why C is correct:

• Higher import prices increase costs of imported inputs, reducing short-run aggregate supply per the cost-push inflation mechanism.

Why the others are wrong:

• A: Raises export prices, reducing net exports and shifting AD left (lower output and prices).
• B: Boosts aggregate demand rightward via fiscal expansion (higher output and prices).
• D: Increases liquidity, shifting AD right (higher output and prices).

Final answer: C