The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse,a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued?
A)The increase in the price of oil would have immediately shifted the AS curve to the right.
B)The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right.
C)Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output,ultimately unemployment will have been unaffected in the long run.
D)All of the above.
E)None of the above.

Question

Quizplus · Accepted Answer

The increase in oil prices would likely shift the Aggregate Supply (AS) curve to the left due to higher production costs, while the financial crisis would shift the Aggregate Demand (AD) curve to the left as spending contracted. These shifts could affect prices and output in the short run, but if potential output (the economy's ability to produce goods and services at full employment) remains unchanged, the long-term impact on unemployment would be minimal, as the economy adjusts back to its potential output level.

The Price of a Barrel of Oil Doubled Between 2007