Question

In: Economics

(a) Oil prices have fallen by about a third since December of last year.

(a) Oil prices have fallen by about a third since December of last year. Is this a positive or a negative aggregate supply shock for China, a net importer of oil? Use the labor market and the production function to predict the effects of lower oil prices on employment, output, and the real wage in China. 

(b) Because of a decrease in the working-age population, Chinese labor force is now shrinking (The Economist, Feb 23, 2019). How does this change your answers in (a) – if at all?

Solutions

Expert Solution

sol: Increase in Aggregate supply leads fall in quantity demanded at that price. This is the condition of Excess Aggregate supply(AS>AD).

During this situation, producers start getting loss and blockage of money . Therefore reduce the prices.

Supply shock has two impacts Positive and Negative supply shock.

1) when an increase in supply leads to a decrease in price, is called positive supply shock.

2) When a decrease in supply leads to rise in price, is called negative supply shock.

in the above case oil price fallen by 1/3 because of excess supply and less demand during COVID-19 pandemic. This is a condition of positive supply shock as increased output leads to decrease in price.

b) Sorry not sure about that

Rahul Sunny answered 2 years ago
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