Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil producing nations. According to the real business cycle theory, the supply shock will, other things being equal

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According to the real business cycle theory, a negative supply shock such as an oil supply shock would cause a decline in real GDP both in the short run and in the long run. This is because the shock would increase the costs of production, leading to a decrease in output and an increase in prices. The economy would need to adjust through a period of recession and reallocation of resources, which would ultimately result in a lower level of output than before the shock.

Suppose There Is an Oil Supply Shock to the U