We can analyze the macroeconomic effects of Hurricane Katrina using the aggregate supply (AS) and aggregate demand (AD) model. The horizontal axis measures real GDP, the vertical axis measures the price level, or the average level of output prices.
Suppose Hurricane Katrina unexpectedly disrupted oil, natural gas, and refined gasoline supplies from the Gulf region, placing upward pressure on energy costs. The hurricane also shut down factories and businesses, reducing the nation's productive capacity. What effect would higher energy prices and reduced productive capacity have on the AS-AD model?
A. The AD curve would shift to the left.
B. The AD curve would shift to the right.
C. Neither the AD curve nor the SRAS curve will shift.
D. Both the AD curve and the SRAS curve will shift to the right.
E. The SRAS curve would shift to the left.
F. The SRAS curve would shift to the right.
G. Both the AD curve and the SRAS curve will shift to the left.
Answer Key: E