e. Assuming there is no government intervention and all prices are eventually flexible, what will happen in the long run? **Be specific** and talk about how your **entire diagram** in **part a** would change.f. Show this change on your diagram in **part a**. Label the new point as **point C**. **Transcription of Text with Diagram Explanation:**### Temporary Change in Oil Prices and Economic Impact**2.** A temporary change in the price of oil can affect an economy in many ways. Here, we will model a decrease in the price of oil using the aggregate demand-aggregate supply model. Our shock in this question will be: **the price of oil temporarily declines, holding all else constant.**Let's start by assuming the US was producing at the full-employment level of output (Yp) with an arbitrary price level (P) before the decline in oil prices.**a.** Represent the US economy at this point with an aggregate demand-aggregate supply graph. Label this initial equilibrium as **point A**.**b.** The price of oil decreases as mentioned above. Assuming this was the only change in the economy, show how this affects the short-run equilibrium in your diagram in part **a**. Label this new point as **point B**.**c.** According to your diagram, is this economy in an expansion or a recession? Explain.**d.** Is the economy experiencing stagflation? Why or why not?### Explanation of the Diagram:- The diagram mentioned would typically include: - **Aggregate Demand (AD) Curve**: Downward sloping, representing the demand for total goods and services in the economy at different price levels. - **Aggregate Supply (AS) Curve**: Upward sloping in the short run, representing the total goods and services that firms are willing to produce at different price levels. - **Initial Equilibrium (Point A)**: The intersection of the initial AD and AS curves, indicating the full-employment level of output (Yp) and initial price level (P). - After the fall in oil prices, the **AS Curve** would shift right as production costs decrease, leading to a new equilibrium at **Point B**. - **Point B**: This represents the new short-run equilibrium with a potentially higher output and lower price level due to the decrease in oil prices, assuming all other factors remain constant.

We will solve the first three subparts only. Please resubmit the question with any other parts you'd…

2. A temporary change in the price of oil can affect an economy in many ways. Here we will model a decrease in the price of oil using the aggregate demand-aggregate supply model. Our shock in this question will be: the price of oil temporarily declines, holding all else constant. Let's start with assuming the US was producing at the full- employment level of output (Yp) with an arbitrary price level (P) before the decline in oil prices. a. Represent the US economy at this point with an aggregate demand-aggregate supply graph. Label this initial equilibrium as point A.

2. A temporary change in the price of oil can affect an economy in many ways. Here we will model a decrease in the price of oil using the aggregate demand-aggregate supply model. Our shock in this question will be: the price of oil temporarily declines, holding all else constant. Let's start with assuming the US was producing at the full- employment level of output (Yp) with an arbitrary price level (P) before the decline in oil prices. a. Represent the US economy at this point with an aggregate demand-aggregate supply graph. Label this initial equilibrium as point A.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

e. Assuming there is no government intervention and all prices are eventually flexible, what will happen in the long run? **Be specific** and talk about how your **entire diagram** in **part a** would change.

f. Show this change on your diagram in **part a**. Label the new point as **point C**.

**Transcription of Text with Diagram Explanation:**

### Temporary Change in Oil Prices and Economic Impact

**2.** A temporary change in the price of oil can affect an economy in many ways. Here, we will model a decrease in the price of oil using the aggregate demand-aggregate supply model. Our shock in this question will be: **the price of oil temporarily declines, holding all else constant.**

Let's start by assuming the US was producing at the full-employment level of output (Yp) with an arbitrary price level (P) before the decline in oil prices.

**a.** Represent the US economy at this point with an aggregate demand-aggregate supply graph. Label this initial equilibrium as **point A**.

**b.** The price of oil decreases as mentioned above. Assuming this was the only change in the economy, show how this affects the short-run equilibrium in your diagram in part **a**. Label this new point as **point B**.

**c.** According to your diagram, is this economy in an expansion or a recession? Explain.

**d.** Is the economy experiencing stagflation? Why or why not?

### Explanation of the Diagram:

- The diagram mentioned would typically include:
- **Aggregate Demand (AD) Curve**: Downward sloping, representing the demand for total goods and services in the economy at different price levels.
- **Aggregate Supply (AS) Curve**: Upward sloping in the short run, representing the total goods and services that firms are willing to produce at different price levels.
- **Initial Equilibrium (Point A)**: The intersection of the initial AD and AS curves, indicating the full-employment level of output (Yp) and initial price level (P).
- After the fall in oil prices, the **AS Curve** would shift right as production costs decrease, leading to a new equilibrium at **Point B**.

- **Point B**: This represents the new short-run equilibrium with a potentially higher output and lower price level due to the decrease in oil prices, assuming all other factors remain constant.

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