After an unexpected increase in the price of oil, the long run adjustment_____ the price level and_____the unemployment rate as they return to original levels.
a- decreases, increases
b- increases, increases
c- increases, decreases
d- decreases, decreases
a?
To determine the correct answer to this question, we need to understand the relationship between the price level and the unemployment rate in the long run. In the long run, the price level is determined by the overall supply of and demand for goods and services in the economy, while the unemployment rate is influenced by factors such as labor market conditions and government policies.
In the scenario described, there has been an unexpected increase in the price of oil. This increase in oil prices can have a significant impact on the overall price level in the economy, as oil is a key input in the production of many goods and services.
In the long run, when the price of oil increases, the higher production costs for businesses can lead to higher prices for finished goods and services. This is known as cost-push inflation. As a result, the overall price level in the economy is likely to increase.
Now let's consider the impact on the unemployment rate. As the price level increases, businesses' production costs rise, which may result in reduced profitability. To maintain their profit margins, businesses may decide to reduce their workforce or limit hiring new employees, leading to an increase in the unemployment rate.
Based on this analysis, the correct answer to the question is:
a- decreases, increases
After an unexpected increase in the price of oil, the long-run adjustment will increase the price level and increase the unemployment rate as they return to their original levels.