Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing fluctuations in...

 

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Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon, and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. Use Fig.1 as your starting point. a. Explain and illustrate the short-run effect of a temporary oil price shock on macroeconomic equilibrium using the AD-AS model. [3 marks]. b. Explain and illustrate the adjustment process back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). [2 marks] ii. Active stabilisation response (i.e., with policy response). Note, there are TWO active stabilisation polices here. Explain both. [4 marks] c. Based on your answers in part (b), does the 'divine coincidence' hold? [1 mark] Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon, and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. Use Fig.1 as your starting point. a. Explain and illustrate the short-run effect of a temporary oil price shock on macroeconomic equilibrium using the AD-AS model. [3 marks]. b. Explain and illustrate the adjustment process back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). [2 marks] ii. Active stabilisation response (i.e., with policy response). Note, there are TWO active stabilisation polices here. Explain both. [4 marks] c. Based on your answers in part (b), does the 'divine coincidence' hold? [1 mark]

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a A temporary oil price shock would lead to an increase in production costs causing a leftward shift ... View the full answer