Question

On December 1,2016, the Organization of the Petroleum Exporting Countries (OPEC) decided to cut crude oil production starting in January 2017.It is expected that this cut in production will result in an increase in crude oil prices. This increase in crude oil prices will shift the short-run aggregate supply (SRAS) curve to the left. This situation is depicted below in the movement of the economy from point A to point B. In the figure below, shift the appropriate curve to depict how the economy reacts in the long run, when all prices are flexible. To refer to the graphing tutorial for this question type, please click here 0) K 21/50 38 OF 50 QUESTIONS COMPLETED

Answer 1

The cut in the oil production is a temporary supply shock and that shifts the aggregate supply curve to the left so the output declines and the price level declines. In the long run the expected inflation falls and the and the AS curve will shifts to its original position and the economy will be in long run equilibrium.

In the long run the expected inflation falls and the aggregate supply increases and the aggregate supply curve shifts back to the original position in the long run.

AS1 LRA AS In the long run the expected inflation declines and the AS curve shifts back to the original position. Price level P1 AD Y1 Real GDP

Ans: Shifts back to the original position.

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