Macro5B Essay Example | Topics and Well Written Essays - 1000 words

Macro5B - Essay Example As statistics show, the GDP rose, unemployment fell and incomes rose bringing the economy back to life. GDP grew from -0.3% in 1980 to 4.1% in 19881 which in return decreased the unemployment rate from 7.1% to 1.6%3 which created a net job increase of approximately 16 million. One of the most ironic statistics is that of inflation; this model has a very optimistic approach towards the economy as economic growth is associated with large scale inflation, however, statistics show that inflation, from 13.5% in 1980 declined to only 4.1% till 1988. It’s a startling fact that outlines the success of this economic model. Focusing on the statistics, one may draw out the conclusion of the success of Reagonomics, there are critics who argue in every field but past trends supported by authentic statistics answer the question of the efficiency of any model, which in this case turned out to be optimistic. A report published in 1996 also draws out the conclusion by stating that the economy of the U.S performed better during the Reagon years4. Answer 2: The whole economy revolves around a few commodities that are essential for day to day operations of a Country; one of the most vital of these commodities is Oil. OPEC is one of the biggest oil companies and each economy is affected by prices set by OPEC (It’s like an oligopoly). Increase or decreases in fuel prices by such monopolies tend to hamper or support economic growth; such monopolies are directly related to a Country’s economic system. In general, oil is known to be a compliment or a raw material for many other goods in an economy therefore a price change of oil may lead to cost push inflation or deflation. In case where OPEC decides to increase the price of oil, this would lead to cost push inflation in the economy; the aggregate (total) supply of the economy would shift upwards bringing about price hikes as shown in the diagram: In the short run, what’s happening is the increase in price o f oil is pushing the supply down and creating price hikes as the short run aggregate supply curve moves from AS1 to AS2. This effect will impact people but not as much in the short run; people are more flexible and have fixed schedules and will not alter their fuel consumption just because of an increase in fuel prices in a day; even if the increase is steep, in the short run it is expected that people would absorb the impact The demand for oil in the short run would be relatively inelastic and the economy would not suffer to a large extent. However, in the long run, situation may be different as people’s demand for oil may become elastic as they want to adapt to changes in an optimistic light. In the long run, the demand for OPEC oil would be relatively elastic and fuel price increases may cause the economy to suffer at large. The direct impact on the economy depends on where the economy is operating at the point and what is the shape of their long run aggregate supply curve as there is a difference in opinion for the monetarist and Keynesian model for long run aggregate supply curve. If we follow the Keynesians model; the impact to the economy of an increase in oil prices depends largely on where the