Suppose an increase in oil prices is accompanied by a decline in the level of potential output.Which of the following is the most likely long-run effect?
A)real GDP will decrease but prices will increase
B)real GDP and prices will both decline
C)real GDP will remain the same but prices will increase
D)real GDP will remain the same but nominal GDP will decrease
E)the unemployment rate and prices will both decrease

Question

Quizplus · Accepted Answer

An increase in oil prices typically leads to higher production costs, which can contribute to inflation (increasing prices). If the level of potential output declines, it suggests a reduction in the economy's capacity to produce goods and services, which can lead to a decrease in real GDP. Thus, the combination of higher prices and lower real GDP is the most likely long-run effect.

Suppose an Increase in Oil Prices Is Accompanied by a Decline