Question

Part 3 (3 points) See Hir 11 Question (7 points) In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects because oil is an important resource in the production of many goods and services. Now consider the long run. What happens when the economy returns to long-run equilibrium? Assume that there have been no policy changes in response to short-run events. Part 1 (1 point) The price level is it was before the oil price spike. Suppose that the graph below shows the U.S. economy in long-run equilibrium before the spike in oil prices. Drag the appropriate part(s) of the graph to show the effect of the oil price increase in the short run. higher than lower than the same as Output is it was before the oil price spike. Part 2 (3 points) higher than lower than the same as Referring to the graph above, what happens in the economy in the short run? Unemployment is it was before the oil price spike. higher than lower than the same as The price level increases decreases stays the same Output increases decreases stays the same Unemployment increases decreases stays the same Real GDPM

Answer 1

The oil is an input for major industries so an increases in the price of oil will lead to an increase in the business cost , the firms cut the production to compensate the increased cost so here the aggregate supply decreases and the short run aggregate supply curve shifts to the left as a result the price level increases and the output declines. This is shown in the below graph,

SRAS2 LRAS SRAS 1 Price level AD 1 Y1 Y Real GDP

Ans: Part 1- In the short run the price level increase , output declines so the unemployment will increase.

Ans: Part 2: So now the economy is below the full employment level of output and having a recessionary gap and this will cause the expected inflation to fall, as the expected inflation falls the short run aggregate supply shifts back to its original position and the economy will be back at the long run equilibrium.

The price level: Same.

Output: Same.

Unemployment : Same.