Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil prices should have caused which of the following to occur?
A) demand-pull inflation
B) demand-push inflation
C) cost-push inflation
D) cost-pull inflation

Question

Quizplus · Accepted Answer

According to the Keynesian model, an increase in the price of a key input (in this case, oil) will lead to a decrease in aggregate supply, as firms face higher costs of production. This will result in a shift of the aggregate supply curve to the left, causing an increase in the price level and a decrease in real output. This is known as cost-push inflation, as the increase in prices is being driven by the increase in production costs. Therefore, option C is the correct answer.

Oil Prices Increased Significantly in 2008