Question

You must a) identify the economic shock taking place, determining if they are supply and/or demand shocks, b) draw the relevant graphs, and c) summarize the impact on equilibrium price and quantity. Make sure that all parts of the graphs are labeled.

3. President Clinton has approved the release of oil from the strategic oil reserves held by the government. How will this impact the US market for oil?

4. Given the answer to (3), how will the market for gasoline be affected?

Answer 1

Rise in the cost of production triggered by the change in energy supply make the inflation and unemloyment worse. this is called supply shock. It results into shifting aggregate supply curve to right and pushing prices up and pushing quantity down.

Following is diagram:

In above diagram, supply shocks in forms of increase cost of output causes shift in Aggregate supply AS1 to AS2.

quantity get reduced to Y2 from Y1. and Price rise from P1 to P2.

3)

• Release of oil from reserves would increase the supply of oil in the market. Supply will become more relative to demand. Thus, Price of oil will crash in market. It will reduce cost of output.

4)

• Market shall be positively impacted in form of more rise in demand for oil at reduced prices. Here supply cruve shall shift to right thereby price of oil will experience dip while quantity oil shall rise.