Suppose the economy is at full employment and the AS curve shifts upward due to a once- and- for- all increase in the price of oil. If the central bank does not respond to this shock,

Question

Quizplus · Accepted Answer

If the central bank does not respond to the upward shift in the AS curve, a recessionary gap will be created, meaning that output will be below potential and unemployment will increase. This will eventually cause the AS curve to shift back downward as prices and wages adjust to the new level of output. This process may take some time and can be painful for the economy, but it is ultimately a self-correcting mechanism. The other answer choices are incorrect because they do not take into account the long-run effects of the oil price shock on the economy.

Suppose the Economy Is at Full Employment and the AS Curve