uppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Question

a. Prices rise; output falls.
b. Prices fall; output falls.
c. Prices rise; output rises.
d. Prices fall; output rises.

Answer 1

In the scenario where a drought destroys much of the wheat crop, this event would negatively impact supply. The destruction of a key agricultural input (wheat) would reduce the overall availability of goods, leading to a leftward shift in the aggregate supply curve.

In the short run, this decrease in supply would result in higher prices due to the scarcity of the good and lower output because producers can produce less. Therefore, the correct answer is:

a. Prices rise; output falls.