Recording-2025-02-27T18_46_09.870Z

Effects of Oil Price Fluctuations on Firms

• Rapid decrease in oil prices affects firms' production costs.

• Permanent changes in oil prices correlate with macroeconomic consequences.

• A permanent decrease in oil prices leads to:

  • Lower cost of production.

  • Potential decrease in firm prices.

Markup and Output Dynamics

• A decrease in the markup leads to:

  • Continued price drops.

  • Output remains below the new natural level.

  • Central banks must reduce interest rates to restore equilibrium.

Short Run vs. Medium Run Effects

• In the Short Run:

  • Output does not return to the initial equilibrium.

  • A new natural level is established due to structural labor market changes.

• In the Medium Run:

  • Output grows beyond previous levels.

  • Prices stabilize at a lower inflation level due to prior decreases.

Example of Inflation Impact

• Initial inflation at 5% reduces to 3% as prices drop.

• Eventually stabilizes at a lower inflation level after a period of decline.

Changes in Labor Market Dynamics

• New wage settings affect the second period's price levels.

• The markup's decrease results primarily from reduced firm costs.

• Prices are expressed as: Prices = 1 + Markup.

Phillips Curve Implications

• As interest rates are lowered, inflation change approaches zero.

• Diagram analysis shows complexity; understanding relationships between three diagrams is crucial to minimize errors.

Special Case Analysis

• Focus on medium-run equilibrium where:

  • The wage-setting (WS) curve shifts due to variables affecting labor dynamics.

  • Workers demand higher wages, resulting in potential labor market adjustments.

Inflation and Unemployment Dynamics

• The Phillips curve reflects that the change in inflation trends positively.

• Central banks may need to adjust interest rates again to control inflation.

• Relative prices change despite fixed expected prices.

• Inflation correlates with the changes in the wage-setting dynamics.

Overall Outcomes

• Post-adjustments:

  • Output permanently decreases.

  • The natural level of output also decreases long-term.

  • Unemployment rates rise permanently due to the structural changes.