Suppose there is a temporary supply shock because of a war in the Middle East,then,ceteris paribus,the ensuing cost push shock ________.
A)would lead to a temporary increase in prices due to a restriction in the supply of oil
B)would lead to a temporary decrease in output as the AS curve would shift to the left
C)would lead to a temporary shift in the AS curve but ultimately output and inflation would return to the original long-run values
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

A temporary supply shock, such as one caused by a war in the Middle East, would indeed lead to a temporary increase in prices due to a restriction in the supply of oil, a decrease in output as the aggregate supply (AS) curve shifts to the left, and a temporary shift in the AS curve with output and inflation eventually returning to their original long-run values, assuming no permanent changes to the economy's capacity to produce.

Suppose There Is a Temporary Supply Shock Because of a War