Country’s real GDP declining—fiscal fix:

This option suggests that both output and prices would decrease, which is not consistent with the typical outcome of an oil shock. While output does decrease due to higher costs, prices generally increase as the supply becomes constrained. Therefore, this choice misrepresents the economic response to an oil shock.

This choice indicates that both output and prices would increase, which is incorrect. An oil shock usually results in higher prices due to increased production costs and lowered output, not an increase in both. Thus, this option does not align with the expected economic behavior during an oil shock.

This option implies that there would be no impact on either output or prices due to an oil shock. However, an oil shock typically disrupts the equilibrium, leading to changes in both output and prices. Therefore, this choice fails to acknowledge the significant effects of an oil shock on the economy.