8. Oil shock in long-run equilibrium: output and price level:
Answer: C
Output decreases while prices increase in long-run equilibrium after an oil shock.
In the long-run equilibrium following an oil shock, the output decreases while the price level increases. This reflects the negative impact of rising oil prices on economic production and inflation.
A) both ↑
This option suggests that both output and prices would increase, which is inaccurate in the context of an oil shock. Typically, an oil shock leads to higher production costs, resulting in a decrease in output, not an increase.
B) both ↓
This option implies that both output and prices would decrease, which does not align with economic principles following an oil shock. While output does decrease, prices generally rise due to the increased cost of oil.
C) output ↓ prices ↑
This is the correct option as it accurately describes the economic outcome of an oil shock. Higher oil prices lead to increased production costs, reducing output while causing a rise in the price level due to inflationary pressures.
D) no change
This option suggests that there would be no change in output or prices, which fails to recognize the significant impact of an oil shock on the economy. An oil shock typically disrupts equilibrium, leading to observable changes in both output and the price level.
Conclusion
The correct answer, C, clearly illustrates the dynamics of an oil shock, where output decreases due to higher production costs and prices increase due to inflationary pressures. All other options misrepresent the economic effects following an oil shock, either suggesting incorrect changes or no changes at all, which undermines the fundamental understanding of such economic scenarios.