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Please make sure to use IS-LM or AS-AD graphical analysis for part C.
In recent months the global oil and gas markets have been impacted by a number of factors—slow growth in demand from industrial countries, slowing of growth and a shift from heavy industry to services in emerging market countries, a sharp increase in production by Iraq, an apparent shift in Saudi Arabia’s strategy from stabilizing price to protecting market share, and the substantial increase in U.S. production of shale oil and gas due to improvements in drilling technology. As a result, oil prices have fallen sharply. Economists and policy makers have been trying to make sense out of the impact of the dramatic drop in oil prices on output, employment, incomes, investment spending, interest rates, and the stock market.
a. How would a classical economist analyze the impact of falling oil prices on long-run equilibrium levels of output, employment, and the price level?
b. How would a Keynesian/neoclassical economist analyze the impact of falling oil prices on short-run and long-run equilibrium levels of output, employment, and the price level? Illustrate your arguments using IS-LM or AS-AD graphical analysis.
c. How would a New Classical economist use the Real Business Cycle framework to understand the impact of falling oil prices on output, employment, and the price level?
d. How would a New Keynesian economist use the DSGE framework with sticky prices or wages to analyze the impact of falling oil prices on output, employment, and the price level?
e. Using any tools that you think appropriate, how would you analyze the impact of falling oil prices on U.S. prices?
f. Finally, what do you think the impact of the fall in oil prices will be on Federal Reserve policy? Will the Fed be inclined to tighten or ease monetary policy? How will they explain their actions in terms of existing economic models?