Based on Your Understanding of the AS- AD Model and IS-

question 63

Essay

Based on your understanding of the AS- AD model and IS- LM model, graphically illustrate and explain what effect a decrease in the price of oil will have on the economy. In your graphs, clearly illustrate the short- run and medium- run equilibria. Also include in your answer an explanation of the effects of this change in the price of oil on the labour market and the equilibrium real wage.

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Definitions:

Marginal Decision Rule

A principle used in economics and decision-making that recommends comparing the additional benefits of a decision or action to its additional costs.

Downward Sloping

Characteristic of a graph indicating that as one variable increases, the other variable decreases, common in demand curves.

Demand

The quantity of a particular good or service that consumers are willing and able to purchase at various prices.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded by consumers at those prices.