Question

Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as fracking becomes more widely used? OR

Answer 1

Answer:

Output or Real GDP will increase because fracking is a form of investment that results in higher productivity, and higher productivity results in more output. As the ouput formula shows:

Y = C + I + G + NX

Where Y is Output, C consumption, I investment, G government spending, and NX net exports (exports minus imports).

Therefore, holding all the other variables constant, if I increases, Y increases too.

Price level will decrease because the supply of fracking will increase. An increase in the supply of a good results in a lower price as long as demand stays more or less constant.

Employment levels will increase as well because the investments in fracking will demand workers, and the lower prices of natural gas, will allow companies to spend less on energy costs, and use the extra revenue to for investments, and thus, hire more workers as well.