Question

What impact did the soaring oil prices of 2007 and the first half of 2008 have...

What impact did the soaring oil prices of 2007 and the first half of 2008 have on the economy? a. They increased SRAS, causing real output and employment to increase. b. They reduced SRAS, causing real output and employment to increase. c. They increased SRAS, causing real output and employment to decline. d. They reduced SRAS, causing real output and employment to decline.

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Answer #1

Correct answer is: d. They reduced SRAS, causing real output and employment to decline.

Explanation: Oil is used in production processes. It is an important input in production. So, soaring oil prices increased the cost of production in the economy. As production becomes expensive, supply in the economy decreases. So, aggregate supply declines in the short run thereby shifting SRAS leftward. So, real output in the economy declines and thereby employment also decreases.

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