Problem: Since fall of 2004, rising oil prices (over $70 per barrel in the Spring of 2006) 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 $70+/barrel versus oil at $40/barrel.
Label your diagram clearly and explain how higher oil prices impact either AS, AD, or both.
Finally, explain why rising oil prices have negatively impacted US equity markets.