SRAS Shift Determines Stagflation Effect

Steps:

• Recall AD-AS model: Equilibrium at intersection of AD and SRAS curves, where price level (P) is vertical and real output (Y) horizontal.
• Identify desired outcome: Increase in P (upward movement) and decrease in Y (leftward movement) from initial equilibrium.
• Analyze shifts: Leftward SRAS shift raises P and lowers Y; rightward SRAS or AD shifts typically increase Y.
• Match options: Only unchanged AD with decreasing SRAS fits both conditions.

Why D is correct:

• A leftward SRAS shift (e.g., due to cost-push factors) intersects unchanged AD at higher P and lower Y, per the short-run aggregate supply curve definition.

Why the others are wrong:

• A: AD decrease lowers P and Y; SRAS increase lowers P and raises Y—net effect lowers P, not raises it.
• B: AD increase with unchanged SRAS raises both P and Y.
• C: Both increases raise Y; P may rise or stay same, but Y does not decrease.

Final answer: D