Explain and illustrate the effect of this shock, and the courses of action the Government and the Bank of England are, in your opinion, likely to take as a consequence. Discuss the implications for business of both the initial shock and the following Government and Bank actions. You should assume that the Government of the day has committed itself to full employment, “prudent” public spending, and no major tax increases. The Bank has an inflation target of 2.5% pa.
A long run equilibrium is one in which the aggregate markets – financial, product and resource, are in equilibrium simultaneously This is made possible by flexible wages and prices and is represented by the intersection of the AD (aggregate demand) curve and the LRAS (long-run aggregate supply) curve. It is important to establish whether the economy is in a long run equilibrium, in order to maintain a ceteris paribus while assessing the speculative increase in the price of oil. By assuming that all other factors are constant, it makes it possible to begin to solve the issues arising through the price rise through a mix of individual and/or grouped solutions.
Oil is a commodity that is deemed demand inelastic. Like many other ‘neccessity’ goods, a change in price will result in a disproportionately lower change in the demand for the good. (See Fig 1) People and firms would be unable to avoid consuming the same amount of oil in the short term even if there was an increase in its price, due to the fact that there are no available direct substitutes. Manufacturing firms who burn oil for power cannot simply shut off their generators, public buses that run on petrol and diesel products will not discontinue their services and citizens who heat their homes and water with oil will need to continue doing just this.
If oil was easily substituted in the short term, or if it had a more elastic demand, then the effects on the national economy would not be so great. People would simply stop buying the commodity and over time, the price would drop back to where the market dictates the equilibrium point of supply and demand. However, because we have asserted that oil would be bought at the new price, albeit marginally less than at the previous one, then the effect on the national economy will be great. Primarily any action taken by the bank or the government will be enacted in order to quell any inflationar...
... middle of paper ...
...tisfied, UK products will appear cheaper to those abroad, and thus there will be a balancing effect on the balance of payments.
In conclusion, I feel that as any increase in the price of oil will only be inflationary in the short term, then using monetary policy to boost AD would prove too risky, as it will create inflationary pressure itself. Indirect taxing is probably the most efficient way of handling the problem, although the average consumer will end up taking a bigger hi than a 15% rise in prices. However, in light of the dangers associated with fossil fuels, I feel that over the long term creating new, environmentally friendly energy sources should be a major objective of the government, and by weakening the grip of the oil industries through a forced reduction in demand they will be creating new energy sector opportunities.
.
Bibliogrphy
Economics – Parkin, Powell, Mathews – 5th Ed. 2003 – Addison-Wesley
Economics – J. Sloman – 4th Ed. 2000 – Prentice Hall
http://www.bankofengland.co.uk/target2point5/economy/costs_prices.htm http://www.casi.org.uk/discuss/1999/msg00787.html http://www.taipeitimes.com/News/biz/archives/2004/05/02/2003153849
http://www.bized.ac.uk
In answering the above question, I shall address myself first to examining manufacturing exports and the British position, followed by a word on the Imperial Preference which hindered British trade flows with the rest of the world. I shall go on to talk more generally about whether there has been a decline in the aggregate economy (essentially exploring the pessimistic implied in the title). Further, I shall argue that the British economy has performed well against some serious cultural and structural constraints and should not be subjected to unduly negative analysis.
... we may see a serious act in the near future to start the process of drilling. With a solid combination and profitability factor the U.S. could prevent the rising gasoline prices. We need to however, continue our search for other alternatives do to our limited resource of oil. For this reason, I am in favor of opening up the Arctic National Wildlife Refuge to oil drilling and also the exploration of alternative fuel sources, as well as ways to conserve fuel. This combination should provide the United States with an energy policy that is both financially stable and environmentally sound.
In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.
In ancient times Babylonians used oil as mortar, Native Americans used oil as a topical medicine, and, before electricity, oil was used to create light. Mankind has been dependant on oil as a resource for generations. It has influenced growth, warfare, and technological advancement, but what if mankind were to run out (Alois)? The possibility of this eventuality was first vocalized by M. King Hubbert who introduced the notion of “peak oil.” When global oil production “peaks” it reaches its greatest output level and then permanently declines (Hubbert). There is much debate as to whether this “peak” exists, has already been passed, or will be passed in the near future. Despite the debate there is one undeniable fact; there is a finite amount of oil since it is a non renewable resource. Considering a sudden systemic collapse of all oil production seems unlikely, oil will probably be replaced gradually. This loss of oil could be positive; possibly less CO2 would enter the atmosphere and global warming may be stalled. However, the success of this transition away from fossil fuels will be largely dependant on the ability of developed nations to manage their time. If the US, or any other nation, is going to be successful, they need to start now.
For the Canadian citizens, it is a good thing because low cost of oil equals low price for gas, therefore the people of this country will have extra money in their pockets: “typical consumers will be saving an average of $25 a week, or $300 in three months” says Elna Cain in her article titled Why Are Gas Prices Low And What Does It Mean For Canadians. That being said, other businesses can benefit from the extra amount of cash. In other words, the beneficiaries of this decline in oil prices are not only the citizens, but other business owners as well. The reason why oil prices fluctuate is because of the law of supply and demand, which states that if the supply is low then the price will be high and if the demand is low then the price will be significantly low, which is the case for gas today.
As it stands, oil companies have a firm grasp of the American economy. As the price of oil increases, the price of living also increases. Not only that, but they are getting away with paying dues they owe. "Oil companies have escaped more than 60 billion dollars in royalties because of a loophole to get access to more leases. The United States is the third largest producer of oil in the world, and 31 percent of that production comes from land owned by the federal government" (Offshore Drilling Will Enrich Big Oil Companies 2). America maintains this title even though "America's crude oil productivity has decreased since 1985" (Crude Oil Production 1). Currently, oil is becoming more expensive and damaging the economy while America is becoming more dependent on foreign oil; decreasing productivity and narrowing offshore drilling.
Peak oil is pretty much like a bell curve, which is a line on a graph that goes in a constant up-and-down pattern. At the top of the bell curve is where peak oil is located on the graph and that means worldwide, half of the resource has been consumed, and that half of the resource that’s been lost will return some thousands of years from now. That’s too long for us to wait, not to mention that fossil fuels are the cause of the ongoing deterioration of the earth’s atmosphere. In the circumstance of oil or some other material like it, production will never increase above where it was at its peak, no matter how money is thrown into the resource. From an investigator’s point of view, if you are attempting to accumulate the pieces of a case’s motives and means, to comprehend what power drives what events, peak oil was nearly within the stroke of a razor’s edge, the solitary part which instigated everything to echo and seem sensible
In 1970 oil reserves became more scarce, leading to a decrease in production, while consumption continued to grow rapidly (Wright, R. T., & Boorse, D. F. 2011). In order to fill the gap between rising demand and falling supply of oil, the United States became more and more dependent on imported oil, primarily from Arab countries in the Middle East. (Wright, R. T., & Boorse, D. F. 2011). As the U.S and many other countries became highly industrialized nations, they became even more dependent on oil imports. With demand being higher than the actual amount of supply, prices kept rising reaching a peak of $140 a barrel in 2008. (Wright, R. T., & Boorse, D. F. 2011).
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
In conclusion, the supply and demand of oil is a complex issue that depends on several factors. Geopolitical affairs are the major issues that affect supply and demand of oil. Geopolitical factors include wars, uprisings and political inconsistencies in the world. Other factors that influence the demand and supply of oil include market domains, availability of oil, recession and the world GDP. Since 1859, the price of oil has been inconsistent. Despite the fact that oil prices increased and fell, there has been a considerable rising trend in those prices. In most cases, the falling of the price reaches the previous price level. However, increase of prices goes beyond earlier prices. This trend has seen oil prices rise over the years. With this in mind, it is clear that by 2020 the real price of oil will be more than 200 dollars.
Bernanke, B. (2009, January 13). The Crisis and the Policy Response. Speech at the Stamp Lecture, London School of Economic, London, England. Retrieved from http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm
It is the role of every government to safeguard its people in all matters including controlling the economy. Every economy faces different challenges including the business cycles that may emanate from the global market. In this paper we try to examine measures taken by the UK’s coalition government in trying to ensure that the economy benefits every citizen and reduces the overall burden to it. We consider the recent comprehensive review on spending.
This event has been drove by the concerns of currency traders who subscribed to the possibility that Brexit might implicate permanent damage on the Britain's economy. This assumption however has been counterfactual as Britain's economy is strong enough to prevent sudden collapse despite temporary jitters. Ever since then, the pound has been traded around 15 percent lower in comparison to the dollar and 12 percent lower when compared with euro. Although it results in domestic inflation that rises faster than workers’ wages, it proved to be be a beneficial economic boon for UK exporters due to the soaring cost of imports. This is a crucial key factor for the automotive industry in particular, where vehicles which may be completed in the UK are often comprised of imported component parts. As a matter of fact, automotive industry is considered the most vulnerable sector in the advent of Brexit because of its global exposure and heavy dependence on foreign workers. Though , both imports and exports in the UK has been boosted by weaker pound as currency strategists pointed that sterling shall remain volatile until greater clarity about the UK’s Brexit deal is
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
For commodity price, the demand and supply are directly contributing to the price volatility. The changes in interest rates and exchange rates are significant influence for commodity output and it also has impact on the commodity prices (Dornbusch 1976). For example, based on the equation of AD=C+I+G+NX. If the government expenditure increases, it will tend to