When an economy in long-run equilibrium experiences a supply shock from substantially higher energy costs, real GDP and the price level are most likely to change in the following way:
- Real GDP decreases and the price level increases.
Here's a step-by-step explanation:
1. **Supply Shock**: A supply shock, such as substantially higher energy costs, leads to an increase in production costs for businesses.
2. **Real GDP**: Due to the increased production costs, businesses may reduce their level of output and production. This decrease in production results in a lower real GDP, as the total value of goods and services produced in the economy decreases.
3. **Price Level**: As businesses face higher costs of production, they are likely to pass on these costs to consumers in the form of higher prices for goods and services. This leads to an increase in the price level, known as inflation.
In summary, when an economy faces a supply shock with substantially higher energy costs, real GDP is likely to decrease as businesses produce less, while the price level is likely to increase due to higher costs being passed on to consumers.
