Answer to Question #262524 in Macroeconomics for eli

Question

Suppose a country imports oil. The world oil price has recently decreased, affecting the country’s domestic aggregate supply. Explain how policymakers find the trade-off between unemployment and inflation in the short run in the country. Diagram(s) required.

Answer 1

Since the country imports oil, the decline in oil prices will have a positive impact on the domestic economy of the country, the aggregate demand will grow. The economy will revive and inflation will appear after the revival of the economy.

Assessing the nature of anti-inflationary policy, there are two approaches to combating it. The first approach (representatives of modern Keynesianism) provides for an active budget policy - maneuvering public spending and taxes in order to influence effective demand.

The second approach is recommended by neoclassical economists who emphasize monetary regulation, which indirectly and flexibly affects the economic situation. This type of regulation is carried out formally by a Central Bank that is not controlled by the government, which changes the amount of money in circulation and loan interest rates, thus affecting the economy.

According to the first approach , the graph:

According to the second approach , the graph: