When the price of oil rises unexpectedly, the price level ________ and the unemployment rate ________ in the short run. a. falls; falls b. falls; rises c. rises; rises d. rises; falls
Question
When the price of oil rises unexpectedly, the price level ________ and the unemployment rate ________ in the short run.
a. falls; falls
b. falls; rises
c. rises; rises
d. rises; falls
Solution
The correct answer is c. rises; rises.
Here's why:
Oil is a major input in production and its price significantly affects the cost of production. When the price of oil rises unexpectedly, it increases the cost of production for many goods and services. This leads to a decrease in short-run aggregate supply, causing the price level in the economy to rise (inflation).
At the same time, because production costs are higher, firms may cut back on production and lay off workers, leading to an increase in the unemployment rate.
So, in the short run, an unexpected rise in the price of oil leads to a rise in both the price level and the unemployment rate.
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