Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level
A)and real GDP are lower than in the initial equilibrium.
B)is lower and real GDP higher than in the initial equilibrium.
C)is higher and real GDP lower than in the initial equilibrium.
D)is higher and real GDP remained the same as in the initial equilibrium.
E)and real GDP are higher than in the initial equilibrium.

Question

Quizplus · Accepted Answer

A rise in input prices like the price of oil would shift the AS (Aggregate Supply) curve to the left, causing a decrease in real GDP and an increase in the price level. Therefore, the new macroeconomic equilibrium would have a higher price level but a lower real GDP than in the initial equilibrium. Choice A and B are incorrect because a rise in input prices would not cause an increase in real GDP, and choice D and E are incorrect because a rise in input prices would cause a decrease in real GDP.

Consider the Basic AD/AS Macro Model