In early 2000s, oil prices were rising because of concern about the Iraqi invasion Kuwait and other situations, along with rapid growth in demand in the Far East. Prices eventually reached over $100 a barrel. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model?
A)They would have no effect because oil prices are a microeconomic phenomenon.
B)They do not change anything, but are evidence of a shift in the aggregated demand curve to the right.
C)Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
D)Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve down (to the right).

Question

Quizplus · Accepted Answer

Higher oil prices increase the cost of production for many goods and services, leading to a decrease in the quantity supplied at any given price level. This is represented in the AD/AS model by a leftward shift of the short-run aggregate supply curve.

In Early 2000s, Oil Prices Were Rising Because of Concern