A positive oil shock: Suppose scientists discover a new way to extract oil from deposits that were previously thought to be unrecoverable. The extra supply of oil leads oil prices to decline. Explain the effect on wages, the employment-population ratio, and unemployment– all for the overall economy.

The impact of decline in oil prices to the overall economy with regard to wages, employment and unemployment is given below.

Explanation:

Oil is used by many firms, some of which use it for production in which case the oil is an input in their related costs while others use it indirectly such as in running of transportation.

When the oil prices decreases it will result in rise in demand for oil by these firms, as they can utilise oil for further production (for direct use) or purchasing & running transportation to be use in their business. This will result in more work and the demand for labour will increase which will cause the wage rate to increase, employment-population ratio to increase and the unemployment to decrease.

answer; functional fixedness;