Question

Can someone please help me with this?
Since fall of 2004, rising oil prices have frequently ended stock market rallies and led to declines in all major stock indexes. Draw an AS/AD diagram which shows the effect on the US macroeconomy of oil at a high price such as $100 per barrel versus oil at a moderate price such as $50 per barrel. Label axes and AS/AD lines on your diagram clearly and explain how higher oil prices impact either AS, AD or both

Thanks.

Answer 1

Energy is an important input to the production of many goods. When the price of oil drops, what should happen to aggregate supply? That is, at any given price will producers be willing to sell more, less, the same??. Shift your supply curve accordingly.

Now then, dropping oil prices should have an income affect on demand. If the price of oil (and subsequently gasoline) drops, you will obviously buy more gas. But will you also have more money to buy anything else? If yes, what does that imply about aggregate demand? Shift your demand curve accordingly.

Take it from here.