Question

Major geo-political events such as the Iran-Iraq war, for example can cause sudden disruptions to oil supplies. What are two strategies that governments or firms can use to reduce the economic risks that these disruptions would otherwise pose to their businesses or societies?

Explain in words how each of the strategies you mentioned above accomplish their goal of risk reduction (i.e., how do they reduce the risk from shocks to oil supplies?).

Answer 1

The two major strategies used by the government to reduce the economic risks are 1)Fiscal policies through which the government can influence the spending activities 2)supply side policies and monetary policies :the long term policies through which the government can improve the productivity and efficiency of the economy
While discussing about the oil prices there was a recent decline in the price of oil since 2014.The recent plunge in oil prices is due to various factors such as several years of increased production of unconventional oil,a decline in the global demand ,appreciation of US dollar etc..
The monetary policy and fiscal policies adopted by the the government will vary depending upon whether the country is an exporter or importer.In general the monetary policy has to respond to deflation risks.Considering the Fiscal policy strategy of the government the countries which are exporting the oil will face a loss and they will reduce the public revenue on the other hand the importers will get benefited from the declining oil price and can rebuild fiscal policy and can follow a expansionary fiscal policy
The optimal policies should be adopted by the government to mitigate the shocks which in turn will affect the aggregate demand of the economy