At the beginning of 2017,a country is at full-employment.During 2017,oil-producing countries decrease oil production leading to much higher oil prices.The higher oil prices can
A)decrease aggregate demand and lead to a stagflation.
B)decrease aggregate supply and lead to a stagflation.
C)decrease aggregate demand and lead to a higher price level.
D)increase aggregate supply and lead to an expansion.
E)increase aggregate demand and lead to an expansion.

Question

Quizplus · Accepted Answer

The decrease in oil production and the resulting higher oil prices will increase the costs of production for firms, leading to a decrease in aggregate supply. This will cause a decrease in real output (GDP) and an increase in the price level (inflation). This is known as stagflation, where the economy experiences stagnant growth and high inflation. Therefore, option B is the correct answer.

At the Beginning of 2017,a Country Is at Full-Employment