In early 2000s, oil prices were rising because of concern about the Iraqi 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 production costs, leading to a decrease in short-run aggregate supply, shifting the curve to the left.

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