Figure 8-6
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. What happens if the price of oil, a key input, increases significantly in the economy?

Question

Figure 8-6 
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. What happens if the price of oil, a key input, increases significantly in the economy?

Quizplus · Accepted Answer

An increase in the price of oil, a key input, will increase production costs for firms, causing a decrease in short-run aggregate supply. The long-run aggregate supply curve is vertical, so it is not affected by temporary changes in production costs. The aggregate demand curve is also not directly affected by changes in production costs. Therefore, only the short-run aggregate supply curve shifts left in response to the increase in the price of oil.

Figure 8-6 -Refer to Figure 8-6. Assume That the Economy Is Initially