Question

Draw an aggregate demand and aggregate supply diagram to show an economy operating at full employment.

Show on this diagram and explain the effects on real GDP, price level and the level of employment in the short run and in the long run of a of a significant increase in the price of oil.

Answer 1

Significant increase in the price of oil will shift the AD curve to the left, so the real GDP will decrease, price level will decrease and the level of employment will decrease too in the short run. In the long run the AS curve will shift to the right, so the real GDP level will increase to the initial level, price level will decrease further and the employment level will increase.