An increase in the price of a resource such as oil
I. shifts the aggregate demand curve leftward.
II. shifts the long-run aggregate supply curve rightward.
III. shifts the short-run aggregate supply curve leftward.
IV. increases the price level and decreases real GDP in the short run.
A) Only I is correct.
B) Only III is correct.
C) Both III and IV are correct.
D) Both I and II are correct.

Question

Quizplus · Accepted Answer

An increase in the price of a resource such as oil will increase the cost of production for firms, thus causing a leftward shift in the short-run aggregate supply curve (III) and ultimately resulting in an increase in the price level and a decrease in real GDP in the short run (IV). However, in the long run, firms may find ways to adjust their production processes or find alternative resources, leading to a rightward shift in the long-run aggregate supply curve (not mentioned in options). The aggregate demand curve is not affected by a change in resource prices, as it represents the level of overall spending in the economy.

An Increase in the Price of a Resource Such as Oil