Exhibit: Supply Shock

In the graph, there are three horizontal lines drawn from the vertical axis. These are labelled for the top, SRAS subscript 1, SRAS subscript 2 and SRAS subscript 2. There is a vertical line beginning from about the centre of the horizontal axis named LRAS. This line cuts the lines SRAS subscript 1, SRAS subscript 2 and SRAS subscript 2 at points C, A and D, respectively. There is a slightly concave decreasing curve namde AD, passing throught point a and cutting SRAS subscript 1 and SRAS subscript 2 at points B and E, respectively.

Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point _____ represents the short-run equilibrium immediately following the drought, and point _____ represents the eventual long-run equilibrium.

P LRAS B C SRAS, A SRAS SRAS2 D E AD Y Y Assume that the economy starts at point A and there