Suppose that there has been bad weather resulting in a temporary decrease in the availability of oil and the economy has reached its new short-run equilibrium. What happens as the economy moves from this short-run equilibrium to long-run equilibrium?
A) Prices and output rise.
B) Prices and output fall.
C) Prices rise and output falls.
D) Prices fall and output rises.

Question

Quizplus · Accepted Answer

In the short-run, the decrease in availability of oil will cause a decrease in output and an increase in prices. However, as the economy moves towards long-run equilibrium, firms will adapt to the decreased availability of oil by finding substitutes or more efficient production methods. This will lead to an increase in output and a decrease in prices, resulting in a new long-run equilibrium with a higher price level than before the bad weather event. Therefore, prices fall and output rises as the economy moves from short-run to long-run equilibrium.

Suppose That There Has Been Bad Weather Resulting in a Temporary