Question

1. Analyze the impact of rising oil prices on the aggregate expenditure and output of the economy of a country

2. Identify 3 injections that may be increased to offset the negative impact of the leakages

Answer 1

1.The rising oil prices leads to inflation in an economy. Oil prices directly affect the prices of goods which uses oil as an input. It indirectly affects the transportation and manufacturing costs. The increase in these costs in turn affect the prices of a variety of goods and services since the producers may shift the production costs to consumers.

Increase in oil prices depress the supply of other goods since it increases the cost of production. It can also reduces the  demand for other goods as it decreases the purchasing power of the consumers.

If an economy imports oil to meet the rising demand, increasing oil prices will push up oil imports and widen it's current account deficit. This increasing current account deficit will result in weakening currency

Rising oil prices also lowers the gross domestic product

2. To offset the negative impact following measures can be adopted.

1. Reducing the taxes and subsidising the product is required to hold the retail product price increase

2. Introduction of demand management and energy efficiency improvement strategies must be made.. This will reduce the consumption of oil in the long run.

3. Another policy is fuel switching. When oil prices are high it may seems to be more efficient if we adopt fuel switching. This means using some other fuel instead of oil.