Shifts in AD and AS from higher costs and better trade balance

Steps:

• Higher unit costs reduce aggregate supply (AS curve shifts left), raising prices and lowering output.
• Improved balance of trade boosts net exports, increasing aggregate demand (AD curve shifts right), raising output and prices.
• Combined effect: higher price level with ambiguous output change, depending on shift magnitudes.
• Diagram B shows leftward AS and rightward AD shifts, matching this stagflationary pressure.

Why B is correct:

• B depicts cost-push inflation (AS left) alongside demand-pull from exports (AD right), per the AD-AS model where net exports are an AD component.

Why the others are wrong:

• A: Only shows AD shift right, ignoring cost impact.
• C: Only shows AS shift left, missing trade improvement.
• D: Shows both shifts left, contradicting trade gain.

Final answer: B