Answer to Question #43527 in Macroeconomics for Tina

Question

Given the significant trend of declining oil price and expected independence of oil production by US in coming decade, draw an AS/AD diagram of macroeconomics model (not the oil market itself), explaining the effect on the US macro-economy of expected decline in oil price in 2014 and beyond. In your explanation in words with the help of the diagram, you must clearly explain the connection between changes in oil price and the fluctuations in macroeconomic fundamentals in the US economy. Then show the impact of continuous fall in oil price on the US economy by using the same AD-AS model during the recovery period of the economy from its great recession of 2008. The most recent price of crude oil is fluctuating within the range between $100 and $105/barrel.
Finally, explain why sharp decline in oil prices might not necessarily have positive or negative impact on the US equity markets (stock market) even at the current trend of declining but volatile oil prices.