Answer to Question #247226 in Macroeconomics for prii

Question

Assuming a fall in the price of oil, use the AD-AS framework to explain the impact on prices employment and income.

Answer 1

Solution:

A decrease in oil prices will lead to higher rates of economic growth. There will be a reduction in transport and fuel costs for firms and hence will be able to offer their employees better pay including offering more employment opportunities. There will be high employment. Producers will also be able to offer cheaper products. Consumers will also benefit from the lower prices of transport and fuel, including cheap commodities. This will increase their disposable income and enable them to increase consumption, hence increasing the overall GDP.

The general price levels will decrease.

 

This is depicted by the below graph: