In early 2008, the price of oil on the world market increased, hitting a peak of about $140 per barrel in July 2008. In the second half of 2008, the price of oil declined, ending the year at just over $40 per barrel. Suppose that the global market for oil can be described by an upwardsloping supply curve and a downward-sloping demand curve. For each of the following scenarios, illustrate graphically how the exogenous event contributed to a rise or a decline in the price of oil in 2008: a) A booming economy in China raised the global demand for oil to record levels in 2008. b) As a result of the financial crisis of 2008, the United States and other developed economies plunged into a severe recession in the latter half of 2008. c) Reduced sectarian violence in Iraq in 2008 enabled Iraq to increase its oil production capacity

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22 January, 13:32

In early 2008, the price of oil on the world market increased, hitting a peak of about $140 per barrel in July 2008. In the second half of 2008, the price of oil declined, ending the year at just over $40 per barrel. Suppose that the global market for oil can be described by an upwardsloping supply curve and a downward-sloping demand curve. For each of the following scenarios, illustrate graphically how the exogenous event contributed to a rise or a decline in the price of oil in 2008: a) A booming economy in China raised the global demand for oil to record levels in 2008. b) As a result of the financial crisis of 2008, the United States and other developed economies plunged into a severe recession in the latter half of 2008. c) Reduced sectarian violence in Iraq in 2008 enabled Iraq to increase its oil production capacity

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Damari Vazquez · Answer 1

a) A booming economy in China raised the global demand for oil to record levels in 2008

The booming Chinese economy shifted the oil demand curve to the right, because now more oil was demanded in the world economy at any given price. Because supply did not increase as much as demand, the price of oil rose.

b) As a result of the financial crisis of 2008, the United States and other developed economies plunged into a severe recession in the latter half of 2008.

The declining advanced economies of late 2008 shifted the oil demand curve to the left, because now less oil was demanded in the world economy at any given price. Because the world's supply of oil did not shrink as fast as demand, the price of oil fell.

c) Reduced sectarian violence in Iraq in 2008 enabled Iraq to increase its oil production capacity.

The more stable Iraq economy shifted the oil supply curve to the right, because now more oil was put in the market at any given price. Depending on the time of the year, this increased supply contributed either to dampening the price increase of early 2008, or to accelerating the price decline of late 2008.