What impact do rising oil prices generally have on aggregate supply?

Rising oil prices generally increase production costs for many industries that rely on oil and its derivatives as inputs. When production costs increase, firms typically face higher expenses in their operations, which can lead them to reduce the quantity of goods and services they supply at any given price level. This results in a leftward shift of the short-run aggregate supply curve, indicating that, at the existing prices, the overall supply in the economy decreases due to the higher costs of production incurred by businesses.

The mechanics of this phenomenon are rooted in the relationship between input costs and supply: as oil prices climb, businesses may struggle to maintain previous levels of output without raising prices or reducing production. Therefore, the correct answer accurately captures the essential economic principle that rising oil prices can lead to a reduction in aggregate supply by increasing the costs that producers face.