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    drag on the economy

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    From The Wall Street Journal, Thursday, December 2, 2004:
    "Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech yesterday at Arizona State University that sustained high oil prices, business caution, the growing trade deficit, consumers' need to rebuild savings and the waning boost from tax cuts could all weigh on the expansion and create 'more opportunities for the Fed to pause.' But if those drags lift, the Fed could raise rates more rapidly."
    With the help of one or more AD-AS diagrams, explain how each of the factors mentioned by Yellen works to create a drag on the economy. Your answer should include a verbal explanation and graphical depiction for each factor. Be clear about the market linkage

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    Solution Preview

    High oil prices raise input factor costs to produce and ship products. This increases the price, which will lower demand. High oil prices also serve to lower the purchasing power of consumers.

    Business caution decrease business investment, ...

    Solution Summary

    What influences a drag on the economy?