Question

The price of oil went down sharply in response to the Coronavirus crisis. How do you expect the decline in the price of oil to influence the economy in the short and medium run?

Answer 1

If we do not consider any other impact of Corona Virus on the economy, fall in price of oil in short run will raise aggregate supply of goods because oil is an input to produce goods and services and fall in cost of production raise producer profit which induce them to produce more goods. It will shift aggregate supply curve to its right from AS to AS1 where price level fall from P to P1 and output level rises from Y to Y1.

In long run, consumers will demand more of the good as there is decline in price in short run which will raise aggregate demand of goods and shift demand curve from AD to AD1 which will raise price to its initial position and raise output level further.