Suppose that an oil cartel effectively increases the price of oil by 100 percent, leading to...

Suppose that an oil cartel effectively increases the price of oil by 100 percent, leading to a supply shock in both Country A and Country B. Assume that both countries were in the long-run equilibrium (full employment) at the same level of output and prices at the time of the shock.

(a) Describe the short-run impact of this supply shock on prices and output in each country. Do not forget to support your answer on a graph.

(b) Now assume that the central bank of country A takes no stabilizing-policy actions (i.e. central bank of Country A does not try to stabilize output). After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to stabilize output. Compare the long-run impact of the adverse supply shock on prices and output in each country (taking into account the reaction of the Central Banks described before). Support your answer with a graph.

Expert Solution

Rahul Sunny answered 2 years ago

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse...

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A takes no stabilizing policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the...

Suppose the price of barrel of oil increases from $50 to $70. Use a basic aggregate...

Suppose the price of barrel of oil increases from $50 to $70. Use a basic aggregate demand and aggregate supply diagram to show the short-run and long-run effects on the economy.

If the price of a good increases by 10 percent and the quantity supplied increases by...

If the price of a good increases by 10 percent and the quantity supplied increases by 5 percent, then the elasticity of supply is

Suppose that OPEC cartel imposes an embargo on oil exports to the US, which causes global...

Suppose that OPEC cartel imposes an embargo on oil exports to the US, which causes global oil prices to double that forces the domestic gas prices to rise to $5 per gallon. Thus, to make gasoline more affordable for American consumers the US Government decides to impose $3 price ceiling on it at the retail level. What would be the economic consequences of such government intervention in the market mechanism? What alternative rationing mechanisms will the market have to resort...

If the price of crude oil, a factor used in the production of gasoline, increases and...

If the price of crude oil, a factor used in the production of gasoline, increases and the number of people who own cars falls:" the equilibrium price of gasoline will increase and equilibrium quantity of gasoline will decrease. the equilibrium price of gasoline will be uncertain and equilibrium quantity of gasoline will decrease. the equilibrium price of gasoline will be uncertain and equilibrium quantity of gasoline will increase.

1. If a cartel succeeds in maintaining the cartel price but cannot prevent the entry of...

1. If a cartel succeeds in maintaining the cartel price but cannot prevent the entry of new firms into the industry: a. the industry’s total output level will rise. b. entry continues until the equilibrium average cost equals the fixed cost. c. entry continues until the equilibrium marginal cost equals the fixed price. d. All of the above are correct. 2. For a competitive firm, marginal revenue equals average revenue because the: a. firm’s supply curve is horizontal. b. industry’s...

Suppose that the spot price of oil is US$19, The quoted 1-year futures price of oil...

Suppose that the spot price of oil is US$19, The quoted 1-year futures price of oil is us$16 The 1-year US$ interest rate is 5% per annum The storage cost of oil are %2 per annum is there an arbitrage opportunity? is yes, please explain how you can observe this opportunity.

Suppose that the number of sellers in a market increases and an increase in price of...

Suppose that the number of sellers in a market increases and an increase in price of a substitute good occurs. What would we expect to happen in the market?

Suppose that the rate of change of the price "x " of a good increases in...

Suppose that the rate of change of the price "x " of a good increases in the time at a constant ratio "c" as a result of inflation constant, at the same time falls proportionally to the difference between supply "y" at time "t" and some equilibrium supply "y0", is say x´ (t) = c - a (y - y0). It is also assumed that the exchange rate of the offer is proportional to the difference between the price and...

f. If a 2 percent decrease in the price of strawberries increases the quantity demanded of...

f. If a 2 percent decrease in the price of strawberries increases the quantity demanded of strawberries by 6 percent and increases the quantity of whipped cream demanded by 5 percent, calculate: i. Price elasticity of demand for strawberries. (1 mark for correct calculation, I mark for interpretation). 6% ------=3 Price elasticity of demand for strawberries is relatively elastic. -2% ii. Cross elasticity of demand for whipping cream with respect to the price of strawberries. (1 mark for correct calculation,...

Question