Since Fall of 2013, the price of oil has shown a steady decline as continued increase of global oil production that has far exceeded the rising demand for oil. Accordingly, many analysts in the energy field have had predicted the likelihood of further decline in oil price in the US market as the US continues to expand its domestic oil production with a long term objective of becoming even net exporter of oil by Y2030. Given that prediction of falling global demand for petroleum oil and rising supply of oil caused significant decline of oil price to come down to as low as $45 per barrel in January 2015 from its price of o $100 in January 2014.
Given the significant trend of declining oil price and expected independence of oil production by US in coming decade, draw an AS/AD diagram of macroeconomics model (not the oil market itself), explaining the effect on the US macro-economy of expected decline in oil price in 2014 and beyond. In your explanation in words with the help of the diagram, you must clearly explain the connection between changes in oil price and the fluctuations in macroeconomic fundamentals in the US economy. Then show the impact of continuous fall in oil price on the US economy by using the same AD-AS model during the recovery period of the economy from its great recession of 2008. The most recent price of crude oil has sharply decline at a 10 -year low level within the range between $50 and $54/barrel. Read this article on most recent price forecast on crude oil. http://www.inddist.com/news/2015/01/gasbuddy-releases-fuel-price-outlook-2015
Finally, explain why sharp decline in oil prices might not necessarily have positive or negative impact on the US equity markets (stock market) even at the current trend of declining but volatile oil prices. 4 pts.
Note: Keep in mind that the oil price is not the same as the price level in macroeconomics diagrams, even though the changes in oil price directly and indirectly affect the general price level (such as CPI and GDPD). You do not necessarily need to draw the diagram for oil market to answer this question. But drawing of macroeconomic model of AD-AS behavior impacted by the changes in oil price is required to substantiate your answer.
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