At the beginning of 2015,a country is at full-employment.During 2015,oil-producing countries decrease oil production leading to much higher oil prices.The higher oil prices can
A)increase aggregate demand and lead to an expansion.
B)increase aggregate supply and lead to an expansion.
C)decrease aggregate demand and lead to a stagflation.
D)decrease aggregate supply and lead to a stagflation.
E)decrease aggregate demand and lead to a higher price level.

Question

Quizplus · Accepted Answer

The decrease in oil production leads to a decrease in aggregate supply, as the cost of production for many goods and services will increase due to higher oil prices. As a result, firms will produce less and charge higher prices, leading to a decrease in real output and employment and an increase in the price level. This is known as stagflation, where the economy experiences both inflation and recession simultaneously. Therefore, the best choice is D.

At the Beginning of 2015,a Country Is at Full-Employment