Activity 6.2: Essay: Energy Prices and the Macroeconomy

Introduction

In this week’s paper, you will discuss a particular event described in the Activity Instructions. You will analyze the effects on the macroeconomy using the ideas from Chapter 15 and examine how your business would react to the situation.

Activity Instructions

Suppose that the price of energy increases in the United States. This could arise because the domestic production of energy could increase in cost, the supply of domestic energy production could decrease, or the price of oil could increase (as of the writing of this question, January 2021, the price per barrel of oil is about half of its level for the several years ending in 2015–https://www.bloomberg.com/quote/CO1:COM).

Part 1

Analyze this event to determine what will happen in the short-run and long-run macroeconomy, using the model from Chapter 15. Do not worry about the exact cause of the increase in price of energy or whether some forms of energy increase in price by a higher percentage than other forms. Rather, just assume that all sources of energy have increased in cost by the same percentage. What will happen to the level of prices? To the output of the economy? To unemployment?

Part 2

How would your firm’s decisions change based on what you’ve learned in Chapter 15 (and from previous chapters, where applicable)? Would they expand or contract their workforce? Would they expand their capital? Are there other changes your firm might make because of the increase in energy prices? Make sure that you explain why the firm may make those changes, and consider both the short-run and long-run effects on the economy.

Writing and Submission Requirements

1.5-2 pages (approx. 300 words per page), not including title page or references page
For standard requirements, review the Discussion and Written Assignment Expectations.

Tips for Success

Be sure to refer to the Essay Tips for Success as you draft your essay. Then, as in the discussion, make sure to discuss the model, what happens to the model, and how the economic variables change–that’s Part 1. Then, once you know what happens to those economic variables you can discuss the firm’s response. As alluded to in the prompt, you can think about what you have learned and discussed in previous weeks to help answer Part 2.

Weekly Learning Goal(s): 1, 2, 3

Find the long-run and short-run equilibrium on an AD/AS graph. (CLO 2)
Understand how events shift the AD, LRAS, and SRAS curves and how those events affect the short-run economy. (CLO 2, 4, 5)
Explain how changes in the macroeconomy can affect businesses. (CLO 4, 5)