Oil shock in long-run equilibrium: output and price level:
Output decreases and prices increase in response to an oil shock in long-run equilibrium.
An oil shock typically leads to higher production costs for many industries, resulting in decreased output and increased price levels in the long run. This dynamic reflects the interplay between supply constraints and demand, where higher costs reduce the quantity supplied while raising prices due to scarcity.
This option suggests that both output and prices would remain unchanged, which is inconsistent with economic theory regarding supply shocks. An oil shock increases production costs, leading to a decrease in output and an increase in prices, not stability in both variables.
This choice is identical to option A and similarly implies that neither output nor prices would change. However, economic principles indicate that an oil shock causes significant disruptions in the economy, affecting both output and prices rather than leaving them constant.
This choice incorrectly suggests that both output and prices would decrease. While output does decrease due to increased production costs, prices typically rise as a result of the reduced supply, contradicting the assertion that prices would also fall.
This option posits that there would be no change in either output or price levels, which misrepresents the economic impact of an oil shock. Given that oil is a critical input in many industries, its price increase leads to a clear reduction in output and a rise in prices, thus making "no change" an inaccurate assessment.
An oil shock inherently disrupts long-run equilibrium by increasing production costs, which leads to decreased output and higher price levels. Among the options provided, only choice C accurately reflects this economic reality, as it indicates the expected outcomes of decreased output and increased prices in the wake of an oil supply shock, emphasizing the interconnected nature of supply and demand in economic equilibrium.
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