An increase in the price level due to an increase in the price of oil
A)leads to an increase in the money wage rate.
B)increases output above potential GDP.
C)creates stagflation in the short- run and will trigger a cost- push inflation.
D)creates stagflation in the short- run and may trigger a cost- push inflation.
E)leads to a decrease in the money wage rate.

Question

Quizplus · Accepted Answer

An increase in the price level due to an increase in the price of oil creates stagflation in the short-run, which means a combination of higher prices and lower output or higher unemployment. This may trigger cost-push inflation, where the higher input costs of production (such as oil) lead to higher prices for goods and services. However, it is unlikely to lead to an increase in the money wage rate, as firms may face lower demand and profitability in the short-run. A decrease in the money wage rate is also unlikely, as workers may resist lower wages and firms may face higher costs due to higher oil prices.

An Increase in the Price Level Due to an Increase