During 2003-2007, the price of crude oil increased substantially on the world market. Other things constant, how will an unanticipated increase in oil prices influence the general level of prices and real output of oil-importing nations such as the United States and Japan?
A) Both real output and the general level of prices will decrease.
B) Both real output and the general level of prices will increase.
C) Real output will increase, and the general level of prices will decrease.
D) Real output will decrease, and the general level of prices will increase.

Question

Quizplus · Accepted Answer

An unanticipated increase in oil prices will result in higher costs for businesses and individuals, ultimately leading to a decrease in real output (as businesses may reduce production or pass on the higher costs to consumers through higher prices), and an increase in the general level of prices (as businesses pass on the higher costs to consumers through higher prices). This effect would be particularly strong for oil-importing nations such as the United States and Japan, as they rely heavily on imported oil. Therefore, the best choice is D.

During 2003-2007, the Price of Crude Oil Increased Substantially on the World