If oil prices fall at the same time that the federal government increases its purchases,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) aggregate output will increase, but the price level may either increase or decrease.

Question

Quizplus · Accepted Answer

When oil prices fall, it will result in a decrease in production costs for firms which will lead to an increase in aggregate output. However, the impact on the price level is ambiguous as it depends on how the decrease in production costs gets passed on to consumers. If the decrease in production costs leads to a decrease in prices, then the price level will fall. However, if the decrease in production costs leads to an increase in profits for firms, then they may increase their prices which will result in an increase in the price level. Additionally, if the federal government increases its purchases, this will also lead to an increase in aggregate output. Therefore, in the short run, aggregate output will increase, but the impact on the price level is uncertain.

If Oil Prices Fall at the Same Time That the Federal