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what will be the effect on a decrease in the price of oil in Brazil draw...

what will be the effect on a decrease in the price of oil in Brazil draw diagram
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Answer #1

Decrease in price of oil, a production input will reduce production cost, hence firms will increase output. This shifts SRAS curve rightward, decreasing price level and increasing output in short run.

In following graph, AD0, LRAS0 and SRAS0 are initial aggregate demand, long-run aggregate supply and short-run aggregate supply curves intersecting at initial long-run equilibrium point A with initial price level P0 and real GDP (potential GDP) Y0.

An increase in aggregate supply shifts SRAS0 rightward to SRAS1, intersecting AD0 at point B with lower price level P1 and higher real GDP Y1 in short run.

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