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What are the Effects of Oil Prices to the Economy? Oil prices have different types of effects to the global economy. It is economically destructive for countries that are still developing and it is financially straining to countries that are already developed. Both the increase and decrease of oil price have huge effects on some aspects of a countries economy such as the supply, demand, and terms of trading. Other economic agents such as the domestic homeowners, central banks, the government, the inflation rates, the exchange rates, and the stock market are also affected when a shock in oil price occurs. The significant decreases in purchasing power of domestic homeowners are caused by the increases of demand for oil. This statement is connected to the increase of precautionary savings and the cost of running anything the uses energy. The increase in the cost of oil production, on the other hand, affects the supply side of the economy. Lastly, due to the heightened costs of import, particularly for net-oil importing nations, strenuous terms of trade occur. There are countries whose economic growth rely on importing oil. This leads to their exposure to other nations, making them easily taken advantage of. To match the world price which is lower, countries must decrease oil prices. At the same time, increase in production costs may cause a negative return for these countries. This is the picture when the federal reserve begins implementing measures and manage economies. Restructuring the economy is the intention to suit the immediate change in the price of oil which has affected the world as a whole. Although, manipulating monetary policies increase the problem according to many economists. A high demand for commodities is created when interest rates are decreased as it causes an increase in the spending of customers. The cost of oil is pressured as the investment grows. There is a state of vulnerability to countries that heavily depend on importing oil. It is great news when an economy has high spending. The underlying problem connected to oil prices are however neglected by countries. There are less savings when there is an increase in the spending of an economy. People save more and cut back on spending when they are blindsided by an immediate increase in gas prices. Less oil or gas is being consumed which makes producers of oil or gas crippled as the price or cost of oil or gas has increased. This now results to the less production of gas and oil by producers or company owners which increases the cost of production. A continuous cycle of monetary decline is to be expected of this. Oil prices also affect the rates of inflation. Two famous economists stated that when a depreciation of the US dollar occurs, oil imports in non-dollar-denominated currencies will become cheap.Study: My Understanding of Products

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