Oil price rise increases production costs, shifting supply curve left

Steps:

• Higher world oil price acts as a supply shock for domestic economy.
• Oil is a key input for many industries, raising variable costs.
• Firms reduce output at each price level to minimize losses.
• This causes aggregate or market supply curve to shift leftward.

Why C is correct:

• Per cost-push theory, higher input prices like oil directly elevate firms' marginal and average costs, reducing supply.

Why the others are wrong:

• A: Expected inflation is an outcome of the supply shift, not its cause.
• B: Disposable income fall affects demand curve, not supply.
• D: Tax reduction would lower costs and shift supply right, opposing the effect.

Final answer: C