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Q20. Article Summary For reasons including overproduction in the United States, a decrease in global demand, and limited production cuts by OPEC, the price of

Q20. Article Summary

For reasons including overproduction in the United States, a decrease in global demand, and limited production cuts by OPEC, the price of oil continued to fall during 2017. The falling prices have led OPEC to institute further cuts in oil production, but this effort has been thwarted by OPEC member Libya, whose production increased to 855,000 barrels a day, roughly triple its daily output from the previous year. Libya has Africa's largest oil reserves, but political unrest and militia blockades have severely restricted output in recent years. Due to political instability, OPEC had excluded Libya, Nigeria, and Iran from its agreement to cut production in 2016, but now all three countries have increased production. According to Michael Lynch, president of Strategic Energy and Economic Research, "A lot of experts figured things were so unstable in Libya and politics were so opaque that they did not want to factor in more supply from there. OPEC has been wounded. It gets back to the problem that OPEC has a lot of members in bad shape, making it difficult for them to call on everybody to make sacrifices equally. So they excluded those three and now it's come back to bite them." In late May, OPEC announced an extension to its cutback agreement, but in the month that followed, oil prices fell 16 percent. The same month, Libya announced plans to increase oil production to 1.5 million barrels a day by the end of 2018, and to 2.2 million barrels a day by 2023. Source: Clifford Krauss, "Libya's Increased Oil Production Thwarts OPEC's Reduction Plans," New York Times, June 20, 2017. Refer to the Article Summary. The unexpected increase in the supply of oil mentioned in the article summary resulted in a decrease in the price of oil. When the price of oil falls unexpectedly due to a supply shock, the equilibrium price level ________ and the unemployment rate ________ in the short run.

a. rises; rises

b. falls; rises

c. falls; falls

d. rises; falls

_______________________________________________________________________

Q21. Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram (or model) to analyze how the housing market collapse (i.e., a steep fall in the housing prices) in the United States will affect the U.S. economy. Be sure to label the initial equilibrium and new equilibrium including the equilibrium price and equilibrium GDP if you draw a diagram.

***If you have any trouble to draw a graph, you can answer the question without a graph. If then, your answer should include all the necessary steps, not just the final outcome. For example, shifts in AD or AS, a change in equilibrium GDP or price.

a. How does it change the short-run macroeconomic equilibrium? Briefly explain (and if you can, illustrate it on your graph.).

b. How does the economy adjust back to long-run equilibrium? Briefly explain (and if you can, illustrate it on your graph.).

__________________________________________________________________

Table 12-12

Real GDP Consumption Planned Investment Government Purchases Net Exports
$4,000 $3,500 $350 $450 -$100
5,000 4,300 350 450 -100
6,000 5,100 350 450 -100
7,000 5,900 350 450 -100

Q22. Refer to Table 12-12. Using the table above, answer the following questions. The numbers in the table are in billions of dollars.

a. What is the equilibrium level of real GDP? Briefly explain your reasoning. (2pts)

b. Assuming that the potential GDP is $7,600 (billions), by how much should government spending

increase so that the economy can move to the full employment level of GDP? Show your work (3pts)

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