20. assume the u.s. economy is initially operating at full employment when the price of oil suddenly…

20. assume the u.s. economy is initially operating at full employment when the price of oil suddenly decreases. which of the graphs below would correctly show this occurrence? a. graph a b. graph b c. graph c

20. assume the u.s. economy is initially operating at full employment when the price of oil suddenly decreases. which of the graphs below would correctly show this occurrence? a. graph a b. graph b c. graph c

Answer

Brief Explanations:

A decrease in the price of oil is a positive supply - side shock. It reduces production costs for firms. As a result, the short - run aggregate supply (AS) curve shifts to the right. In the AD - AS model, when the AS curve shifts right, output (Y) increases and the price level (PL) decreases in the short run. Graph B shows the AS curve shifting to the right (from AS to AS₂), resulting in a lower price level (PL₂ < PL₁) and higher output (Y₂ > Y₁).

Answer:

B. Graph B