Figure 8-6
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. If oil prices in the economy increased dramatically and remained high for so long that most of the industries in the economy had to significantly form new capital and retool much of its existing capital, the economy would suffer. In this event,

Question

Figure 8-6 
-Refer to Figure 8-6. Assume that the economy is initially in long-run equilibrium. If oil prices in the economy increased dramatically and remained high for so long that most of the industries in the economy had to significantly form new capital and retool much of its existing capital, the economy would suffer. In this event,

Quizplus · Accepted Answer

An increase in oil prices would cause an increase in production costs for many industries, causing a decrease in long-run aggregate supply. Additionally, the need for significant capital formation and retooling would cause a temporary decrease in short-run aggregate supply as well. This would reduce the economy's potential output and prospects for economic growth. The aggregate demand curve may also shift left as a result of decreased output and higher prices, but this is not the primary effect. Thus, choice A is the best answer.

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