Answer to Question #123407 in Macroeconomics for Nirmal kaur

Question

The text notes that changes in oil prices can affect the inflation-unemployment outcome. Explain what effect changes in oil prices may have on these two variables.

Answer 1

The oil prices affect the inflation as well as unemployment rate. If oil prices are increased, then price of goods and services which uses oils for transportation and production, will increase. Hence with the increases in the price of oil leads to inflation because price level in the economy rises and vice-versa in case of decrease in the oil prices.

Since there is an inverse relationship between inflation rate and unemployment rate. So with the increases in the inflation rate, the unemployment rate decreases and vice-versa in case of decrease in the oil prices.

Therefore this implies that a change in the price of oils have opposite effect on the inflation and unemployment rate.