Suppose decreased production of oil in the Middle East cause

Suppose decreased production of oil in the Middle East causes the price of oil to rise around the world. Explain how this change in the price signals information to U.S. producers of various goods, provides incentives to U.S. producers of various goods, and affects the distribution of income ?

Solution

Oil is a major raw material and is used in the production of a large number of goods.If price of oil rises, the price of a large number of goods rise.This is because the marginal cost of production rises as price of oil rises.The supply curve shifts to the left and the price rises.Aggregate supply falls in the economy.

Distribution of income:

Since the price has risen the distribution of income will be in favor of producers and against consumers.