How do large increases in oil prices affect the economy? What ...

[Arii_bell]

How do large increases in oil prices affect the economy?
 
  What will be an ideal response?

Question 2

Trend refers to
 
  A) increases but not decreases of a variable.
  B) the difference between the maximum value of the variable and the minimum value of the variable.
  C) a general tendency for a variable to rise or fall.
  D) the scale used on the x- and y-axes.
  E) decreases but not increases of a variable.

[Bsand8]

Answer to Question 1

Proponents of real business cycle theory tend to emphasize the importance of changing input prices- especially the price of oil. A large increase in the price of oil is likely to decrease the productivity of firms that use oil. Since almost all firms use oil in one form or another - oil products are a key source of energy - changes in the price of oil function like technology changes. As oil price changes can be abrupt, including large increases in the price of oil, this factor does help to explain recessions.

Answer to Question 2

C