Question

The oil price shocks of 20062009: Between 2006 and the middle of 2008, oil prices rose sharplyfrom around $60 to more than $140 per barrel. By the end of 2008, however, oil prices had fallen even more sharply, to just over $40 per barrel. Think of these events as two separate shocks.

Answer 1

Answer:

A supply shock is an unpredictable incident that changes the supply of a product or a service, subsequent in an unexpected modification in its value. Supply shocks can be undesirable (decreased supply) or optimistic (increased supply)

(a) The two types of shock which are:  

• Primarily the growth in oil values is a negative supply shock causing from a decline in supply of oil  
• The reduction in oil charges is a Positive supply shock causing from a growth in supply of oil.

(b) If the charges of oil increases as in case (i) that will push companies’ prices and thus decrease SRAS. The new equilibrium will be established at a inferior level of output and higher charge level. This is reflected in the diagram attached.

In the case (ii), the opposed of this will occur. The SRAS will rise shifting the SRAS rightward and carry about a new equilibrium at upper level of output and lesser prices.