Answer to Question #241009 in Macroeconomics for imogen

Question

Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing significant fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon, and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. Use Fig.1 as your starting point. 

Explain and illustrate the adjustment process back to long-run equilibrium based on the following

ii. Active stabilisation response (i.e., with policy response). Note, there are TWO active stabilisation polices here. Explain both. [4 marks] 

Answer 1

When there is no response to the fiscal policy, this makes the parent company to take advantage of the situation and exploit the consumers. The long-run equilibrium will accommodate a high oil price which will adversely affect the economy negatively. Most of the businesses are driven through the transport network. Therefore, the situation may lead to prices rising all over the country, resulting to decline in the economic growth. Customers will limit there spendings as the price level might be more than what other can afford. For a long period, this may lead to inflation.