In the short run, an increase in the price of a major input such as oil will:
A) decrease both the price level and the level of output.
B) decrease the price level and increase the level of output.
C) increase the price level and decrease the level of output.
D) increase the price level and increase the level of output.

Question

Quizplus · Accepted Answer

An increase in the price of a major input such as oil will increase the cost of production for firms, leading to a decrease in the level of output. As a result of the decrease in the level of output, there will be a decrease in the supply of goods and services in the economy, leading to an increase in the price level. Hence, option C is correct.

In the Short Run, an Increase in the Price of a Major