Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing significant fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. 1. Explain and illustrate the short-run effect of a temporary oil price shock on macroeconomic equilibrium using the AD-AS model. 2. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). ii. Active stabilisation response (i.e., with policy response). [Hint: there could be two active stabilisation polices here].

Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing significant fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. 1. Explain and illustrate the short-run effect of a temporary oil price shock on macroeconomic equilibrium using the AD-AS model. 2. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). ii. Active stabilisation response (i.e., with policy response). [Hint: there could be two active stabilisation polices here].

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Let us define "peak oil" as a point in time where the quantity of oil extracted and consumed (let's just assume these are the same) reaches a maximum and then starts to decline. Based on economic theory, (in other words, I'm not asking you to predict anything specific about the oil market in the real world, just a general theory question) should we expect this period of declining production to be accompanied by high and rising prices or by low/falling prices? Give a brief explanation using graphs where appropriate.
A key skill in economics is the ability to use the theory of demand and supply to analyze specific markets. In this assignment you get a chance to demonstrate your ability to analyze the effects of several “shocks” to the market for coffee. Answer all parts of each of the scenario below. Suppose that, as part of an international trade agreement, the Malaysia government reduces the tariff on imported coffee. Will this affect the supply or demand for coffee? Why? Which determinant of demand or supply is being affected?
a) Due to Covid-19, meatpackers are facing substantially higher costs and people are panic buying meat. As a result, we can expect (at least temporarily) Lower prices and no change in quantity Higher prices and an uncertain change in quantity Higher prices and a certain increase in quantity Higher prices and a certain decrease in quantity b) If, against the request of the US, Saudi Arabia decides to further increase the supply of crude oil to the world market, we would expect as a result that (all else equal) the Equilibrium price of crude oil will decrease, and the equilibrium quantity will increase Equilibrium price of crude oil will increase, and the equilibrium quantity will decrease Equilibrium price and quantity of crude oil will increase Equilibrium price and quantity of crude oil will decrease
“The oil Price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.” Source: Hamilton, J.D., 2009. Causes and Consequences of the Oil Shock of 2007-08 (No. w15002). National Bureau of Economic Research. a) Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift. b) Different theories…
The immediate effect of gasoline price increases in the aftermath of the Persian Gulf in August 1990 on gasoline consumption was not very significant. Would you expec consumption of gasoline to be more severely affected if these higher prices remain effect for a year or more? Why or why not?
Explain what would happen in the following markets given the following demand or supply shocks. In your answer clearly state what happened to supply or demand (whether it increased or decreased) and what would likely happen to the equilibrium price and quantity as a result, other factors constant. Market: Electric vehicles. Shock: Due to the recently enacted CHIPS Act, there is a significant decrease in the price of U.S. semiconductors, which are used as an input in the production of electric vehicles. Market: In home exercise equipment. Shock: Due to the waning concerns around the COVID-19 pandemic and loosening restrictions, U.S. consumers go back to gyms and public recreational centers. Market: U.S. Cotton. Shock: There is a significant drought in the Southwestern U.S., where the majority of U.S. cotton is grown. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for…
The economy of Ashville is currently in a macroeconomic equilibrium, as depicted by point E, in the accompanying figure. The main component of Ashville's exports consist of the raw materials that it derives from its natural resources. Suppose that the world demand for raw materials decreases sharply, resulting in a decrease in the price of raw materials throughout the world. The decrease in the world demand for raw materials, which is the major source of Ashville's exports, will the level of aggregate demand in Ashville, causing a ▼shift in the AD curve. The decrease in the world demand for raw materials, which implies a decrease in the level of factor prices, leads to in the unit cost of production in Ashville, causing a 7 shift in the AS curve. Use the three-point curve drawing tool twice to draw and label new AS and AD curves that shows the effect of this shock on Ashville's economy. Carefully follow the instructions above, and only draw the required object. The overall effect of…
Show the effect this shock has on the market for almonds by shifting the demand curve, supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. PRICE (Dollars per ton) 40 32 32 Supply Demand 24 24 16 8 0 8 16 24 Demand QUANTITY (Thousands of tons) 32 40 Supply One of the growers is pleased with the price increase caused by the pests because she believes it will lead to increased revenue. Using elasticities, you will be able to determine whether this price change will lead to a rise or fall in total revenue in this market. Using the midpoint method, the price elasticity of demand for almonds between the price levels of $20 and $28 per ton is between these two points, demand is . Thus, you can conclude that the grower's claim is due to the pestilence. meaning that because total revenue will Confirm your previous…
Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run (Q = 90 and Q = 300) and that the demands for gold and silver are given by the following equations: PG = 990 - Qg +0.50PS and Ps = 630 -Qs +0.50PG What the the equilibrium prices of gold and silver? The equilibrium price of gold is $ 1420 and the equlibrium price of siliver is $ 1040. (Enter your responses rounded to two decimal places.) What if a new discovery of gold doubles the quantity supplied to 180? How will this discovery affect the prices of both gold and silver? The equilibrium price of gold will be $ and the equlibrium price of siliver will be $
Explain the dynamic effect by taking "Oil Prices and Inflation" as an example?
Suppose the economy of the hypothetical country “X” is currently in equilibrium at point A on thegraph. There were two major shocks to the economy in 2020.First shock was related to oil prices; the other was related to consumer confidence about futurebusiness conditions. Oil Shock: The economy X faced a rise in the average price of oil along with the rise of world price ofoil.E) Would an increase in oil prices cause a demand shock or a supply shock? Redraw the diagram toillustrate the effect of this shock by shifting the appropriate curve. What happens to theAggregate output and price level after the shock? (3)F) If policymakers wish to prevent the equilibrium output from changing in response to the oilprice increase, should they use contractionary or expansionary fiscal policy? (Redraw the graphfrom part E and show the change) (4)G) Even if the economy moves back to original Aggregate output, will there be any drawback? (1)Consumer Confidence Index: The Consumer Confidence Index…
Recent data from the Bureau of Labor Statistics show that the average price level for consumers rose 5.4% over the past year. While some are expressing concern over rising inflation leading the economy to “overheat,” there is some evidence indicating that this is due to the reopening of the economy as producers adjust to rising demand for goods and services. Many of the goods with the largest price increases, like bacon or cars and trucks, cannot have their production ramped up as quickly as demand is increasing. Other industries are facing supply chain challenges, like shortages of truck drivers. These problems are most likely to be short term, so, as supply catches up with demand, we can expect to see prices return to normal. As evidence, after spiking to record highs in early summer, lumber prices have now fallen below their price at the start of the year. The reason for the dramatic price increase earlier in the year was a combination of reduced supply in 2019 and a surge in demand…