By itself, a supply shock such as a hike in the price of oil, can
A) cause a wage-price spiral.
B) not cause inflation.
C) be inflationary as long as there is no policy response.
D) cause real GDP to permanently decrease year after year.

Question

Quizplus · Accepted Answer

A supply shock such as a hike in the price of oil can lead to higher costs of production and decreased supply, which may result in an increase in prices. However, if the increase in prices is not sustained or if there is no policy response (such as a decrease in aggregate demand), then inflation may not occur. Therefore, option B is the best choice as it states that a supply shock may not cause inflation. The other options are either not always correct (A) or too extreme (C and D).

By Itself, a Supply Shock Such as a Hike in the Price