According to the real business cycle theory, the true statement about the effects of an oil shock in the 1970s is:
C. The shock shifted the short-run aggregate supply curve but not the long-run aggregate supply curve.
In the real business cycle theory, fluctuations in economic activity are primarily driven by exogenous shocks to productivity, such as changes in technology or resource availability. An oil shock, which refers to a sudden and significant increase in oil prices, can be considered an exogenous shock.
According to the theory, an oil shock would primarily impact the short-run aggregate supply (SRAS) curve, which represents the relationship between the overall price level and the quantity of goods and services that firms are willing to supply in the short run. An increase in oil prices would increase production costs for firms, leading to a leftward shift of the SRAS curve.
The long-run aggregate supply (LRAS) curve, on the other hand, represents the relationship between the overall price level and the potential output of the economy in the long run. The theory suggests that the LRAS curve is primarily determined by factors such as technology, labor force, and capital stock. Therefore, an oil shock would not have a significant impact on the LRAS curve.
Regarding the other options:
A. Relative prices changed but there was no impact on the price level in general - This statement does not fully capture the effects of an oil shock, as it typically leads to an increase in the general price level.
B. The natural rate of unemployment remained unchanged, but employment levels did decline - An oil shock can have impacts on both the natural rate of unemployment and employment levels, so this statement is not accurate.
D. The shock affected real variables only and did not affect nominal variables - An oil shock can have both real and nominal effects, as it often leads to inflationary pressures and changes in relative prices. Therefore, this statement is not correct.