Suppose that this increase in oil prices was permanent. What are the long run effects on...

Suppose that this increase in oil prices was permanent. What are the long run effects on the economy?

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Expert Solution

If there will be a permanent increase in oil price when it will affect the long run aggregate supply curve. First of all there will be a shift in the short run aggregate supply the to the left. Therefore in short run there will be a contraction in output at higher price level known as supply shock. If there will be a permanent increase then vertical long run aggregate supply curve will shift to the left. The economy will be under employment. Also the aggregate demand curve will shift to the left so there will be equilibrium at lower output and higher price.

Rahul Sunny answered 2 years ago

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