5. Shifts of the aggregate supply curve Which of the following would properly be classified as a favorable supply shock? There is an increase in government spending. There is a technological improvement that allows firms to reduce their costs of production permanently. The world price of oil increases rapidly without warning and is expected to remain at the new high level for many years, making it more expensive for all firms to produce goods and services.

There is a technological improvement that allows firms to reduce their costs of production permanently

Explanation:

A favourable supply shock refers to an event that increases supply.

A technological improvement which reduces cost of production is a positive occurrence because supply can increase as cost of production falls.

An increase in the world price of oil is a negative supply shock because if increases cost of production and supply falls as a result.

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