12 .Assume an economy is at full-employment equilibrium when a negative supply shock occur following will occur in the short-run except: (A)Stagflation (B) A decrease in real output (C) An increase in price level (D) An increase in unemployment (E) A decrease in aggregate demand

The correct answer is (E) A decrease in aggregate demand.<br /><br />Explanation:<br /><br />When a negative supply shock occurs in an economy that is initially at full-employment equilibrium, the following effects are likely to occur in the short-run:<br /><br />(A) key input like oil, can lead to higher inflation and stagnant economic growth, resulting in stagflation.<br /><br />(B) A decrease in real output: The negative supply shock reduces the overall production capacity of the economy, leading to a decrease in real output.<br /><br />(C) An increase in price level: The reduced supply, combined with the same or higher aggregate demand, leads to an increase in the overall price level.<br /><br />(D) An increase in unemployment: The decrease in real output and the higher price level can lead to an increase in unemployment as back on production and employment.<br /><br />(E) A decrease in aggregate demand: This is the exception. In the short-run, a may remain unchanged or even increase due to higher prices and inflationary expectations.<br /><br />Therefore, the correct answer is (E) A decrease in aggregate demand, as this is the outcome that is least likely to occur in the short-run following a negative supply shock.