Economic Response to Oil Price Shock Quiz

What is the likely outcome in an economy where the Central Bank increases the nominal money supply to counter an oil price shock in the medium run?

Which scenario describes the consequence of Central Bank intervention in response to an oil price shock?

What happens to output in the medium run if the Central Bank intervenes with a nominal money supply increase during an oil price shock?

Which of the following is most likely an effect of a Central Bank's one-time increase in money supply due to an oil shock?

How does the Central Bank's response to an oil price shock influence long-term economic stability?

Central Bank Intervention and Oil Price Shock

A Central Bank's one-time increase in nominal money supply aims to mitigate the effects of an oil price shock.
In the medium run, this intervention leads to a lesser increase in prices compared to an economy that does not implement such measures.
The nominal money supply increase is intended to stabilize inflation levels following an oil price surge.
By injecting more money into the economy, the Central Bank attempts to counteract potential deflationary pressures caused by rising oil prices.

Impact on Output Levels

Despite the monetary intervention, the output levels will remain closer to the initial level rather than experiencing a decline.
This suggests that the economy maintains its productive capacity better due to the Central Bank's actions.
In contrast, an economy that does not intervene may see a more substantial decline in output due to unchecked inflation and reduced consumer spending.

Conclusion

Central Bank actions can temporarily shield the economy from severe price increases linked to oil supply shocks while keeping output stable.
The effectiveness of monetary policy in such scenarios highlights the crucial role of central banks in stabilizing economies during external shocks.

Test your understanding of how a central bank's intervention impacts an economy facing an oil price shock. This quiz will explore the outcomes of different monetary policy responses and their effects on prices and output in both the short and medium run. Challenge your grasp of monetary economics and its implications for economic stability.