Question

Suppose pessimism still permeates the economy and now oil-producing countries cut production. Using the AD/AS graph below, determine the effect of these events on real GDP, the unemployment rate, and the price level. Assume the change in AD is of equal magnitude as the change in AS.

The AD function                            [ Select ]                       ["decreases", "does not shift", "increases"]         and the AS function                            [ Select ]                       ["does not shift", "decreases", "increases"]         .

The impact on the economic indicators is:

Real GDP                            [ Select ]                       ["increases", "decreases", "remains the same"]      

Unemployment                            [ Select ]                       ["decreases", "remains the same", "increases"]      

Price level

Answer 1

Pessimism still exists in the economy and now oil producing countries cut their production. 1. AD function : Cut in oil production affect the inflation level and aggregate demand of good and services. Cut in oil production declines the prices of oil in economy .There are many products related with the production of oil. So fall in oil production and its prices results fall in general price level. Fall in price level increases consumer real income and purchasing power. It will increase the aggregate demand of good and services. It shifts AD curve into rightward 2. Real GDP : Decline in oil production affects the aggregate supply of good and services economy. There are many goods which can be produced using crude oil. So fall in oil production reduces of production almost all goods. So it reduces aggregate supply of good and services. Then real GDP will decrease 3. Unemployment. : Cut in oil production reduces the labor demand by firms with constant labor supply. Fall in labor demand results increase in unemployment rate due to job losses as apart of cut in oil production 4.Price level: Fall in oil production results fall in oil prices. Decline in oil prices , leads to decrease in general price level in the economy