Macro Economics Essay Example | Topics and Well Written Essays - 500 words - 7

Macro Economics - Essay Example The increase in oil prices has led to the increase in production cost in these industries. Since Sweden is a big importer of oil, this increase will lead to a decrease in output and an increase in the rate of inflation. Since an increase in inflation rate reduces the level of unemployment, this increase in oil prices will also lead to a reduction in unemployment. The increase in oil prices cause capital input to reduce since it has become expensive to operate machinery and hence a decrease in the marginal product if labor. This will cause the short run and long run aggregate supply curves to shift leftwards. Since the increase does not affect the demand side components, the AD curve will not move. The nominal wages and prices will rise from a low point to a high point. The rise in price level will lead to a decrease in the real money supply. It will also lead to a rise in interest rates from a lower rate to a higher rate. This is a reduction in the investment factor aggregate demand. The consumption factor also decreases despite the government expenditure not changing. The shock caused by the supply side is similar to that caused by the demand side, the main difference being that it causes inflation and deflation1. In cases where the country would want to treat the shock caused by the supply side as it treats that caused by the demand side b y trying to stimulate the economy by using monetary or fiscal policies to shift the aggregate demand curve it will not succeed. This is because the nominal wages are only sticky downwards and attempting that would cause the inflation to increase further making the economy to deteriorate. In the short run, the aggregate supply curve will move to the left from short run AS1 to short run AS2. The intersection between the short run AS2 and AD 1 moves upwards towards the left. At to a higher point .At this high point, output decreases, and the price level increases. This forms short run