Higher resource prices shift the
A) long-run aggregate supply curve leftward, decreasing real GDP and increasing potential GDP.
B) short-run aggregate supply curve leftward, raising the price level and decreasing potential GDP.
C) short-run aggregate supply curve leftward, raising the price level and decreasing real GDP so it is less than potential GDP.
D) short-run aggregate supply curve rightward, raising the price level and decreasing real GDP so it is less than potential GDP.

Question

Quizplus · Accepted Answer

Higher resource prices increase the cost of production for firms, which leads to a decrease in short-run aggregate supply. This shifts the short-run aggregate supply curve leftward, causing a rise in the price level and a decrease in real GDP. As potential GDP is not affected by short-term changes, it remains unchanged. Therefore, the economy moves away from potential GDP, resulting in a decrease in real GDP that is less than potential GDP.

Higher Resource Prices Shift the