What are the effects of a financial crisis on short-run aggregate supp

What are the effects of a financial crisis on short-run aggregate supply? How might long-run aggregate supply be affected?

What will be an ideal response?

ANSWER

A financial crisis affects short-run aggregate supply by first affecting aggregate demand. The decline in economic activity that results from disruption of credit markets causes output to fall below potential output. The resulting slack in the economy prevents producers from raising prices as much as they otherwise would, so both inflation and expected inflation decline, shifting the SRAS curve down. If the financial sector’s ability to channel funds to productive opportunities is not quickly restored, businesses will be unable to utilize resources as efficiently as before; the long-run aggregate supply curve has shifted to the left.