In the summer of 2023, many parts of the United States experienced extreme heat. According to a Wall Street Journal article, “if the weather pattern so far this summer continues through August, Texas’ gross state product this year will be reduced by roughly $9.5 billion, a 0.47 % lower growth rate.”

a. Does extreme heat create a supply shock, a demand shock, or both? Explain.

b. Draw an aggregate demand and aggregate supply graph representing the economy of Texas, and use the graph to explain the effects of summer heat.

c. What would you expect to happen to prices of goods in Texas?