Question

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. Focusing only on the U.S. economy, determine how this kind of event affects the price level, unemployment rate, and real GDP in both the short-run and the long-run. Assume the economy was in long-run equilibrium before this change, and consider only this stated change.

Answer 1

Answer - As the price of oil rose in US , the rise in the price of oil will lead to the increase in the price of other goods also. The increased oil price will affect the supply and make the supply of the goods more costly . The rise in price of oil will brimg the inflation in the economy due to rise in price of other goods.

The increase in the cost of supply will lead to increased cost of production and hence the unemployment will increase. The supply will decrease in the short run because the rise in price will not affect the long run supply. This fall will reduce the value of GDP in short run as well as long run because of the increase in the price levels , decrease in demand due to higher prices and decrease in level of output produced