What happens to the aggregate price level

Reference no: EM131789483

Question: 1. Oil prices have risen temporarily, due to political uncertainty in the Middle East. An advisor to the Fed suggests, "Higher oil prices reduce aggregate demand. To offset this we must increase the money supply. Then the price level won't need to adjust to restore equilibrium, and we'll prevent a recession." In this question we will analyze this statement using the FE-IS-LM model.

Consider that an increase in of oil prices reduces the amount of oil used in the production process and results in a negative productivity shock.

a. Explain, with the help of graphs, the direct impact of the oil shock on the FE line.

b. Explain, with the help of graphs, the direct impact of the oil shock on the IS curve.

c. Explain with the help of graphs what happens to the expected real interest rate, output, consumption, savings and investment (If necessary assume that the shift of the FE line is smaller than the shift of the IS curve).

d. Explain with the help of graphs how the economy converges to the general equilibrium after the shock. What happens to the aggregate price level?

e. Explain with the help of graphs what the Fed should do in order to avoid a change in the price level.

f. Use your findings to comment the statement.

Reference no: EM131789483

Questions Cloud

That influence employee compensation and benefits : What are the Factors That Influence Employee Compensation and Benefits, and what are some of their features?

Find the average rate of change : The figure shows the percent of the U.S. population with diabetes (diagnosed and undiagnosed) for selected years from 2010 and projections to 2050.

A definition of cognitive dissonance : Based on the Learning Resources from this week, explain which solution you think will be most effective in reducing dissonance and explain why.

What is the maximum amount kewco would be willing to pay : Find the cost of equity capital for KewCo? What is the maximum amount KewCo would be willing to pay for this new product line today

What happens to the aggregate price level : Oil prices have risen temporarily, due to political uncertainty in the Middle East. An advisor to the Fed suggests, "Higher oil prices reduce aggregate demand.

Prepare a cash budget for the four months ending december : De Angelo plans to keep her old loom whether or not she buys the new loom. Prepare a cash budget for the four months ending December 31, 20X7

Post and describe your favorite toy or game as a child : Indicate at which cognitive stage of development you were when you played with this toy and explain how your play reflected that stage of cognitive development.

How is the gross profit on sale recognized in statement : How is the gross profit on the sale recognized in the consolidated financial statements for 2015

Numerical derivative of the function : Check your result in part (a) by graphing both it and the numerical derivative of the function.

User Account

All Pages