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Suppose OPEC breaks apart and oil prices fall substantially. Initially, which curve shifts in the aggregate...

Suppose OPEC breaks apart and oil prices fall substantially. Initially, which curve shifts in the aggregate supply/aggregate demand model? In what direction does it shift? What happens to the price level and real output (GDP). Graph your answer.

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Answer #1

A Breaking of OPEC and decrease in the oil prices will make the production easier and the cheaper. It will act as a positive supply shock and it will shift the AS curve to the right. The prices will fall and the production will increase. IN the graph below the initially, the equilibrium was at point A. After the fall in the oil prices, the new equilibrium is at point B.

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