Macroeconomics 8th Edition by David Colander

Exercise 3

When it comes to understanding inflation, and even other aspects of the business cycle, ecological economists will often emphasize the role of energy, and especially oil, in shaping macroeconomic outcomes. In this chapter, you were briefly introduced to the analytical concepts of demand-pull and cost-push inflation. To decide how important oil prices are in shaping macroeconomic outcomes such as inflation, do the following:
a. Graph the average annual CPI inflation rate from 1970-2000s (www.bls.gov has the data); graph the world price of oil over the same time period (www.eia.doe.gov/emeu/cabs/chron.html has these data); overlay the graphs (this is sometimes called "tear drop analysis") and move them forward and backward a bit to create leads and lags. What kind of a pattern do you see?
b. Use the AD/AS model to analyze the impact of an oil shock on the economy.
c. What is the necessary consequence of using fiscal policy to stimulate the economy after a supply-side oil shock? What conclusions do you draw from the analysis? (Institutionalist)