Real oil prices decreased significantly during the 1990s. The following graph shows the initial equilibrium at point A and the shift in aggregate supply due to lower oil prices:

a. Identify the new equilibrium output gap and inflation rate.
b. Assuming that monetary policy does not change, show on the graph how the economy will adjust to the new long-run equilibrium.

Transcribed Image Text:

AS AS2 AD Y' = 0 Output gap,Y (percent deviation from potential GDP)