Question 25

A recession is a possible outcome of increasing oil prices.

When the price of oil increases significantly, it can lead to higher production costs for businesses, which may ultimately result in a decrease in economic activity and a potential recession.

A) Increase in real GDP

An increase in real GDP typically indicates economic growth. However, rising oil prices can increase costs for businesses and consumers, leading to decreased consumption and investment, which would not support an increase in real GDP.

B) Recession

A recession is characterized by a decline in economic activity, and rising oil prices can contribute to this by increasing production costs and reducing consumer spending. Higher oil prices can strain household budgets and business expenditures, potentially leading to reduced economic output.

C) Reduction in unemployment

A reduction in unemployment generally occurs during periods of economic growth. Increasing oil prices can lead to layoffs as companies face higher expenses, which may ultimately result in increased unemployment rather than a reduction.

D) Lower rate of inflation

Higher oil prices typically lead to increased costs for goods and services, which can contribute to higher inflation rates, not lower. Consequently, the relationship between rising oil prices and inflation tends to be positive rather than negative.

Conclusion

In summary, the correct answer is B) Recession, as rising oil prices can adversely affect economic activity, leading to decreased GDP and increased unemployment. All other options fail to account for the negative economic impacts associated with increasing oil prices, making them less plausible outcomes in this context.