Suppose OPEC announces it will be expanding the production of oil, decreasing its cost in the world market. How would this be represented in the AD/AS model?
A) The long-run aggregate supply curve would shift to the left
B) The long-run aggregate supply curve would shift to the right
C) The short-run aggregate supply curve would shift to the left.
D) The short-run aggregate supply curve would shift to the right.

Question

Quizplus · Accepted Answer

An increase in oil production would result in a decrease in the cost of production for firms, which would cause a shift in the short-run aggregate supply curve to the right. This would lead to a decrease in price levels and an increase in output, which would be reflected by a movement along the aggregate demand curve. In the long run, the increase in output would also lead to an increase in the natural rate of output and a shift in the long-run aggregate supply curve to the right. However, this is not the immediate effect and would take some time to adjust.

Suppose OPEC Announces It Will Be Expanding the Production of Oil