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Chapter 12: Q9. (page 259)

True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Meaning and shifts in the aggregate supply

Aggregate supply is the price level for the output at a given output level, which the suppliers receive.In different words, it is the total output supplied in the economy worth the price level.

A change in productivity or production costs (input prices) shifts the aggregate supply curve. A decrease in aggregate supply will create cost-push inflation in the economy. On the contrary, an increase in aggregate supply will pull the economy towards full employment and price stability.

02

Reason for the false statement.

An increase in oil prices by a significant amount will shift the AS curve to the left because of the increased input costs for the U.S. economy. Due to the leftward shift of the AS curve, the price level will rise.

The prices are flexible upward, so the price level will not be stuck at the initial level by the leftward shift in the AS curve. That’s why the oil prices increased in 1973, causing the infamous oil-price shocks of the 1970s.

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Most popular questions from this chapter

What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?

What are examples of aggregate demand?

Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.

What shifts the aggregate demand curve?

Which of the following help to explain why the aggregate demand curve slopes downward?

  1. When the domestic price level rises, our goods and services become more expensive to foreigners.

  2. When government spending rises, the price level falls.

  3. There is an inverse relationship between consumer expectations and personal taxes.

  4. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.
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