A large decrease in oil prices is an example of
A) a downward inflation shock.
B) an upward inflation shock.
C) inflation inertia.
D) excessive aggregate demand.
E) a self-correcting tendency.

Question

Quizplus · Accepted Answer

A large decrease in oil prices would lead to a decrease in production costs for firms, allowing them to lower their prices and potentially resulting in a downward inflation shock. This would be in contrast to an upward inflation shock, which would occur if there were a significant increase in prices across the economy. Inflation inertia refers to the tendency for prices to continue rising even after the initial shock that caused the increase has dissipated. Excessive aggregate demand refers to a situation in which demand for goods and services outstrips supply, leading to rising prices. The self-correcting tendency refers to the idea that market forces will eventually lead to a return to equilibrium, with prices and output adjusting to clear any imbalances in supply and demand.

A Large Decrease in Oil Prices Is an Example of