Question

In: Economics

Graph how would a significant increase of the oil price affect a) Money Supply/Demand Graph b)...

Graph how would a significant increase of the oil price affect

a) Money Supply/Demand Graph

b) Market Equilibrium Graph

c) Nominal Rate of Interest Graph

Solutions

Expert Solution

SUBPART A and C

An increase in oil price would increase the price level in the economy (inflation) .


money supply and money demand curve shifts to the left, as a result the nominal interest rate 'r' falls

Subpart b

A significant increase in oil price, would increase the cost of production of those goods in which oil is major input. An increase in the cost of production would lead to a leftward shift in the supply curve, demand remaining the same.

hence, the price rises to P' and Q falls to Q' giving the new equilibrium E1

Rahul Sunny answered 2 years ago
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