Which of the following best depicts the short-run effect of a price shock due to a large increase in oil prices?
A)The IA line shifts up, causing interest rates to rise, which causes the AD curve to shift to the right.
B)The IA line shifts up, causing interest rates to rise, which causes a leftward movement along the AD curve.
C)The AD curve shifts to the left, causing interest rates to rise, which causes the IA line to shift down.
D)The IA line shifts down, causing interest rates to rise, which causes a leftward movement along the AD curve.
E)The IA line shifts up, causing interest rates to rise, which causes the AD curve to shift to the left.

Question

Quizplus · Accepted Answer

A large increase in oil prices leads to an increase in production costs for firms, causing a leftward shift in the SRAS curve. This results in higher prices and a lower level of output (i.e. a movement up along the AD curve). The increase in prices increases the demand for money, leading to a rise in interest rates. As a result, the IA line shifts up (to reflect higher interest rates), and this causes a leftward movement along the AD curve.

Which of the Following Best Depicts the Short-Run Effect of a Price