Use the following to answer questions .
Exhibit: Economic Growth, AD and AS Analysis
-(Exhibit: Economic Growth, AD and AS Analysis) 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

Use the following to answer questions .
Exhibit: Economic Growth, AD and AS Analysis 
-(Exhibit: Economic Growth, AD and AS Analysis) 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 would increase production costs for firms, leading to a decrease in short-run aggregate supply. There would be no immediate effect on the long-run aggregate supply as the economy has not had time to adjust to the new price level. However, in the long run, the economy would adjust and the long-run aggregate supply would also shift leftwards. The aggregate demand curve is not directly affected by changes in input prices and hence would not shift.

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