Suppose the economy is initially in equilibrium and then an energy shock occurs,such as when OPEC raised oil prices.Which of the following is likely to result?
A)Both the price level and aggregate output will rise.
B)Both aggregate output and the price level will fall.
C)Employment will rise.
D)Stagflation.
E)The price level will fall.

Question

Quizplus · Accepted Answer

An energy shock, such as raising oil prices, is likely to lead to stagflation, which is a simultaneous increase in both inflation and unemployment as aggregate output falls. This is because the increase in production costs from the higher oil prices will lead to a decrease in aggregate supply, and higher prices will reduce aggregate demand, resulting in a decrease in output and higher inflation. Therefore, choice D is the best answer.

Suppose the Economy Is Initially in Equilibrium and Then an Energy