In the mainstream view, the economic instability brought about by "oil shocks" works through changes in
A) aggregate demand.
B) wage and price inﬂexibility.
C) money supply.
D) aggregate supply.

Question

Quizplus · Accepted Answer

The mainstream view holds that oil shocks primarily affect the supply side of the economy, as they increase the cost of production for firms and reduce the potential output of the economy. This is due to the fact that oil is a key input in many production processes, so a sharp increase in its price can lead to higher costs for businesses, lower profitability, and a reduction in investment and output. As a result, the aggregate supply curve shifts to the left, causing higher prices and lower output, rather than changes in aggregate demand or monetary policy.

In the Mainstream View, the Economic Instability Brought About by "Oil