A sudden increase in oil prices represents a supply shock that shifts which curve in the AD-AS framework?

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Prepare for the Rutgers Macroeconomics Test with multiple choice questions, hints, and explanations. Master key concepts and excel in your exam!

Multiple Choice

A sudden increase in oil prices represents a supply shock that shifts which curve in the AD-AS framework?

Explanation:
A sudden rise in oil prices acts as a negative supply shock, raising production costs across the economy. In the AD-AS framework, this shows up as a leftward shift of the short-run aggregate supply curve: at every price level, firms can produce less because inputs are more expensive. The immediate effect is higher overall price levels and lower real output in the short run (and unemployment tends to rise). The long-run aggregate supply isn’t moved by a temporary price change in oil, and the aggregate demand curve isn’t directly driven by this shock, so the key change is the leftward shift of the AS curve.

A sudden rise in oil prices acts as a negative supply shock, raising production costs across the economy. In the AD-AS framework, this shows up as a leftward shift of the short-run aggregate supply curve: at every price level, firms can produce less because inputs are more expensive. The immediate effect is higher overall price levels and lower real output in the short run (and unemployment tends to rise). The long-run aggregate supply isn’t moved by a temporary price change in oil, and the aggregate demand curve isn’t directly driven by this shock, so the key change is the leftward shift of the AS curve.

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