Inflation and Oil PricesInflation refers to a persistent increase in the price level over time and is one of the most dangerous threats to an economy because if it left unchecked, it will erode the purchasing power of a currency and if the country's monetary system is destroyed, may ultimately force individuals to adopt foreign currencies. There are two types of inflation: demand-pull inflation and cost-pull inflation. Cost-push inflation: a situation in which inflation persists in the economy due to the initial decrease in aggregate supply is caused by an increase in the relative price of an important factor of production, namely wastewater and energy. The 1970 oil crisis is an apt example of cost-push inflation (supply shock). Answer 1) Short-run aggregate supply is the relationship between real GDP and the price level. In other words, it shows how much the economy can produce in the short term. An increase in the price of oil in the short term will force producers to reduce the supply of oil in the economy. The following diagram will adequately explain the effect of rising oil prices on aggregate supply in the short run: SRAS''SRASDemandThe figure above shows that when the price of oil rises, producers will shift supply towards backward due to high input prices. As a result, real GDP falls and the price level rises, creating a serious situation of stagflation. Answer 2) Rising oil prices will also be a serious concern for consumers. Working on the law of demand, as the price of oil increases, consumers of oil-related products, i.e. gasoline, will reduce their demand at higher prices. Thus, their oil consumption for driving, combustion and production will be reduced. (Prasodjo) Answer 3) As we said before... middle of document...... DP and unemployment levels. The AS-AD model shows a negative relationship between the level of inflation and unemployment. In other words, with supply shocks due to rising oil prices, we see a decline in the GDP rate, which increases unemployment rates. Thus, rising oil prices will not only lead to high inflation, but also high unemployment and reduced economic growth. This same effect is shown in the Philips curve. (Parkin) Works Cited Federal Reserve Bank of San Francisco. What are the possible causes and consequences of the rise in oil prices on the global economy. November 2007. The web. December 14, 2013.Parkin, Michael. “Inflation, Unemployment, and Business Cycles in the United States.” Institute, CFA. Economy. Boston: Custom, 2011. 188-210. Print.Prasodjo, Darmawan. Analysis of oil prices: supply, demand and futures trading. December 2013. The web. December 14 2013.