In early 2000s, oil prices were rising because of concern about the Iraqi invasion Kuwait and other situations, along with rapid growth in demand in the Far East. Prices eventually reached over $100 a barrel. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model?
A. Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve down (to the right).
B. Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
C. They do not change anything, but are evidence of a shift in the aggregated demand curve to the right.
D. They would have no effect because oil prices are a microeconomic phenomenon.
Answer: B
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