Aggregate Demand and Aggregate Supply
Respond to the following:
During the 1973 Arab-Israeli War, Arab members of the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo against the US. The resulting oil shortage triggered a recession that lasted from 1973 to 1975. Since oil is such an important input in all sectors of the economy, the oil shortage shifted the US aggregate supply (AS) curve inward to the left, relative to aggregate demand (AD), causing GDP to fall or stagnate while the price level soared. We now refer to this phenomenon as "stagflation".
- Now that oil prices are dropping, use aggregate demand (AD) and aggregate supply (AS) to explain why this is good for consumers.
- What impact does declining oil prices have on inflation?
- Is there a downside to low oil prices? Who are the winners and losers in the economy?