RW

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.