The oil shock of 2007-2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008,and decreasing again to just over $30 a barrel in December 2008.Assuming the economy was at potential GDP prior to the oil shock,the increase in the price of oil,such as what occurred between March 2007 and July 2008,acts as a negative supply shock,causing the inflation rate to ________ and the output gap to ________.
A) increase; become negative
B) increase; become positive
C) decrease; become negative
D) decrease; become positive

Question

Quizplus · Accepted Answer

A negative supply shock, like a rise in oil prices, typically increases inflation and causes a negative output gap as production costs rise and output decreases.

The Oil Shock of 2007-2008 Saw the Price of Oil