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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 are examples of aggregate demand?

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?

Explain: “Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.” In each case, specify the price-level outcomes.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

  1. A widespread fear by consumers of an impending economic depression.

  2. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

  3. A reduction in interest rates.

  4. A major increase in spending for health care by the federal government.

  5. The general expectation of coming rapid inflation.

  6. The complete disintegration of OPEC, causing oil prices to fall by one-half.

  7. A 10 percent across-the-board reduction in personal income tax rates.

  8. A sizable increase in labor productivity (with no change in nominal wages).

  9. A 12 percent increase in nominal wages (with no change in productivity).

  10. An increase in exports that exceeds an increase in imports (not due to tariffs).

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