Question

A decrease in energy prices in the short run generally ________.

1) decreases real output
2) increases nominal output but not real output
3) increases real output corresponds to an increase in the unemployment rate
4) has no impact on either nominal or real output

Answer 1

A short-run decrease in energy prices generally increases real output due to a positive supply shock, leading to a rightward shift in the AS curve and lower unemployment rates. However, neoclassical perspective posits that, in the long run, real GDP is determined by potential GDP and aggregate supply.

Step-by-step explanation:

A decrease in energy prices in the short run generally increases real output. This outcome is explained by a shift in the aggregate supply (AS) curve. A decrease in energy prices is a type of positive supply shock that leads to a rightward shift in the AS curve, facilitating the production of more real GDP at a lower price level. The association with unemployment is such that this shift would also lead to lower unemployment rates, as depicted by a downward shift toward the origin of the Phillips curve, which represents the trade-off between inflation and unemployment.

In the neoclassical perspective, while changes in aggregate demand can impact output and unemployment in the short run, these effects are transient. In the long run, when wages and prices are flexible, it is the potential GDP and aggregate supply that determine the actual size of real GDP, aligning with the economy's production capabilities without generating inflationary pressures.