Final answer:
A temporary increase in the price of oil will lead to a decrease in current output, employment, the real wage, national saving, and investment, and an increase in the real interest rate. These effects are temporary and will diminish over time as the economy adjusts.
Step-by-step explanation:
In the short run, a temporary increase in the price of oil (a temporary adverse supply shock) will have several effects on the economy:
- Current output and employment will decrease. As the price of oil rises, businesses will face higher costs of production, leading to a decrease in output and a decrease in the demand for labor, resulting in higher unemployment.
- The real wage, which is the purchasing power of workers' wages, will decrease. As prices rise due to higher oil prices, workers' wages will not be able to keep up, leading to a decrease in the real wage.
- National saving will decrease. With lower output and employment, households and businesses will have less income to save, resulting in a decrease in national saving.
- Investment will decrease. With lower output and a decrease in national saving, there will be less funds available for businesses to invest in new projects and expand.
- The real interest rate, which is the cost of borrowing or the return on saving adjusted for inflation, will increase. As national saving decreases, there will be less funds available for borrowing, leading to an increase in the real interest rate.
It is important to note that these effects are only temporary, as the supply shock is temporary. Over time, as wages and prices adjust, the economy will return to its full-employment level of output and the effects described above will diminish.