Answer: Since, oil is used in the production as it is an example of input in the production process. A decrease in the price of oil (or raw material or inputs) would increase the aggregate supply in the economy. The producer would produce more at given price level because its cost of production has decreased (cost of oil used in the production has fallen). It means, The AS curve would shift to right (Downwards) from AS0 to AS1 . This would decrease the price level from P0 to P1 level and increases the output from Y0 to Y1 level. The initial equilibrium was at e0 level while the new equilibrium level would be at e1 level which shows a decrease in the price level and increase in the real output level from initial level.
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