Question

When OPEC (Organization for Petroleum Exporting Countries) was established and started to apply a quota (restriction) in petroleum production, this triggered a crisis that we called as stagflation (supply shock) in 1970s. Can you write what did happen and why did it happen clearly by drawing a graph to explain this crisis. Don’t forget to label the graph and also explain how an economy get rid of from this crisis?

Answer 1

Question : When OPEC (Organization for Petroleum Exporting Countries) was established and started to apply a quota (restriction) in petroleum production, this triggered a crisis that we called as stagflation (supply shock) in 1970s. Can you write what did happen and why did it happen clearly by drawing a graph to explain this crisis. Don’t forget to label the graph and also explain how an economy get rid of from this crisis?

Answer: in the early 1970s, OPEC reduced the supply of oil which leads to increase in price of oil worldwide. This increase in oil price caused stagflation that is increase in oil price and reduction in output and employment .this can be explain with the help of diagram suppose due to supply shock short run supply curve shifted upward leads to increase in oil price and also reduce output. This is in the Short run. In the long run fed will take measures and increase the aggregate demand so in the long run output will be remain at it's initial position while there will be increase in price which is not corrected by increasing demand. Diagram is given below.

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