Answer to Question #279667 in Macroeconomics for Kaju

Question

Consider an economy in medium run equilibrium. Examine the medium run impact of an increase in petroleum prices on the level of output and the rate of unemployment in this economy.

Answer 1

According to experts, an increase in oil prices diminishes aggregate supply because high energy prices cause businesses to buy less energy. As a result, the productivity of any given amount of capital and labor will fall, potentially resulting in a loss of output.