Question

Which of the following scenarios would lead to an increase in the price level (i.e., a short-run inflation)?

a. an increase in payroll taxes leading to an increase in aggregate demand.
b. an increase in business pessimism regarding future profitability that decreases short-run aggregate supply.
c. an increase in oil prices that decreases short-run aggregate supply.
d. an increase in oil prices that leads to a reduction in aggregate demand.

Answer 1

An increase in oil prices that decreases short-run aggregate supply would lead to an increase in the price level or short-run inflation.

Step-by-step explanation:

An increase in oil prices that decreases short-run aggregate supply would lead to an increase in the price level or short-run inflation. When oil prices rise, the cost of production increases for many firms, causing a leftward shift in the short-run aggregate supply curve. This leads to a higher price level and a lower level of output in the short run.