An increase in the price level due to an increase in the price of oil
A)creates stagflation in the short-run and will trigger a cost-push inflation.
B)creates stagflation in the short-run and may trigger off a cost-push inflation.
C)increases output above potential GDP.
D)leads to an increase in the money wage rate.
E)leads to a decrease in the money wage rate.

Question

Quizplus · Accepted Answer

An increase in the price level due to an increase in the price of oil will lead to stagflation in the short-run, as higher input costs will reduce output and increase unemployment. This may trigger off a cost-push inflation, as firms may pass on higher costs to consumers through higher prices. However, the increase in the price level does not increase output above potential GDP and is unlikely to lead to an increase in the money wage rate, as firms may choose to cut wages to reduce costs in response to the higher input prices.

An Increase in the Price Level Due to an Increase