The year 1973 was a bad year for alloil-importing nations such as the United Sta

Question

The year 1973 was a bad year for alloil-importing nations such as the United States. A war betweenIsrael and the Arab nations led to a quadrupling of oil prices bythe Organization of Petroleum Exporting Countries (OPEC). Thisincrease in oil prices greatly affected aggregate supply inoil-importing nations.

The graph below shows an economy's aggregate demand curve and itsshort-run and long-run aggregate supply curves (labeled AD, SRAS,and LRAS, respectively). Initially, the economy is in macroeconomicequilibrium. Rising oil prices raise economy-wide costs ofproduction, shifting the SRAS curve from SRAS1 to SRAS2.

Explanation / Answer

I am not 100% sure of this one; however, I believe I am notthat much off: B.   Stabilization policy cannot affect output in the face of asupply shock. B.   Stabilization policy cannot affect output in the face of asupply shock. B.   Stabilization policy cannot affect output in the face of asupply shock.

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