For this question,assume that the economy is initially operating at the natural level of output.An increase in the price of oil will cause which of the following in the medium run?
A)a reduction in the interest rate
B)a reduction in output and an increase in the aggregate price level
C)a reduction in output and a reduction in the interest rate
D)a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price level
E) a reduction in the aggregate price level and no change in output

Question

Quizplus · Accepted Answer

An increase in the price of oil will increase the costs of production for firms, which will lead to lower profitability and lower supply. Lower supply will shift the aggregate supply curve to the left, resulting in a higher equilibrium price level and lower output. The reduction in output and increase in the price level is consistent with option B. In the medium run, the economy will adjust to a new equilibrium with lower output and higher prices. The interest rate is not necessarily affected by the increase in the price of oil, so options A and C are not correct. Option D involves an increase in the nominal wage, which is not necessarily implied by an increase in the price of oil. Option E suggests a reduction in the price level without any change in output, which is not consistent with the AS/AD model.

For This Question,assume That the Economy Is Initially Operating at the Natural