The article titled “when the supply shocks are demand shocks and the demand shocks are supply shocks” discusses the effect of changes in oil price on the economy of the United States. According to the writer, high oil prices that result from high demand affect the economy negatively while high prices that result from high demand and economic growth benefit the economy (Yglesias par. 1). He argues that factors such as the exchange rate and issuance of government bonds have the potential to affect the economy more than oil does. The writer discusses several aspects of the oil market that can hurt the American economy. For instance, changes in oil production, political supply shocks, rising oil prices, and changes in oil demand have different effects on the economy (Yglesias par. 2). The author adds that the economy is affected by both supply and demand shocks. Changes in oil prices affect the economy because of the significant role that oil plays in driving various sectors of the economy. The author argues that factors such as the nature of supply and demand shocks, their persistence, as well as the size can affect the economy significantly (Yglesias par. 4). The author notes that high oil prices can affect the economy negatively. For instance, productivity drops because economic sectors like labor markets, transport, and manufacturing are affected severely.
Four economic terms mentioned in the article include demand, supply, price, and inflation. Oil is one of the commodities that affect the American economy considerably. Therefore, aspects such as supply, demand, and prices are important. The material covered in the article impacts the economy extensively. Important aspects to consider in the oil markets include the demand and supply of oil. High demand causes a surge in prices because of a reduction in supply. On the other hand, high prices have the potential effect of affecting the economy because of reduced productivity. High oil prices can have severe effects on the economy. These effects include a reduction in the production capacity of the economy, a rise in inflation, and reduced growth. The supply and prices of oil are important because the U.S. uses the commodity to enhance production in different economic sectors. For instance, it is used in the manufacture of plastics and chemicals (Yglesias par. 4).
On the other hand, it plays an important role in the labor market and supplies chain sectors of the economy. The arguments presented by the author in the article are correct because oil plays an important role in growing the American economy. As a major commodity, changes in oil prices affect the economy adversely. For instance, in 2007, high oil prices increased inflation significantly and affected the economy severely. In order to avoid the recurrence of such occurrences, it is important to invest in alternative sources of energy. Green energy is a good alternative that can reduce dependence on oil for energy. If America embraces alternative energy, then changes in oil prices, supply, and demand will have negligible effects on the economy. As the author observes, high oil prices can reduce household income significantly. The main problem is that high oil prices do not emanate from high global demand. The central bank considers the cause of high prices as resulting from factors unrelated to demand in order to deal with inflation effectively. Inflation weakens the economy and renders the recovery process difficult.
Yglesis, Matt. When the Supply Shocks are Demand Shocks and the Demand Shocks are Supply Shocks. 2012. Web.