What would be the effect of an unexpected decrease in the price of oil on a grap

Question

What would be the effect of an unexpected decrease in the price of oil on a graph showing aggregate demand and short-rum aggregate supply that is initially in equilibrium? The effect of an unexpected decrease in the price of oil will be for the OA. aggregate demand curve to shift up O B. short-run aggregate supply curve to shift down. O C. aggregate demand curve to shift down. O D. short-run aggregate supply curve to shift up. The new equilibrium will be where 0 A, the new short-run aggregate supply curve interects the original short-run aggregate supply curve. O B. the new short-run aggregate supply curve interects the original aggregate demand curve. O C. the original short-run aggregate supply curve interects the original aggregate demand curve O D. the new short-run aggregate supply curve interects a new aggregate demand curve.

Explanation / Answer

(1) Option (B)

Unexpected decrease in price of oil will lower the cost of inputs, therefore firms will increase supply, shifting short run aggregate supply (SRAS) curve rightwards (down).

(2) Option (B)

New short-run equilibrium will be at point of intersection between new SRAS and original AD curves.

NOTE: New long-run equilibrium will be at point of intersection between new SRAS and new AD curves. But question is not clear whether "new equilibrium" refers to short run or long run.

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