Oil Price Shocks Both the long-run aggregate supply curve and the short-run aggr

Question

Oil Price Shocks
Both the long-run aggregate supply curve and the short-run aggregate supply curve shift in response to changes in the availability of labor or capital or to changes in technology and productivity. A widespread temporary change in the prices of factors of production, however, can cause a shift in the short-run aggregate supply curve without affecting the long-run aggregate supply curve.

Tasks:
Suppose there is a temporary but significant increase in oil prices in an economy with an upward-sloping Short-Run Aggregate Supply (SRAS) curve. If policymakers wish to prevent the equilibrium price level from changing in response to the oil price increase, should they increase or decrease the quantity of money in circulation? Why?

Explanation / Answer

The oil price is increased; the SRAS curve shifts upwards as a result price increases. The aggregate demand curve has to shift downwards. At higher price demand will fall so, the policy makers should decrease the money circulation.

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