Assume that the economy is beginning at equilibrium

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Assume that the economy is beginning at equilibrium. There is a supply shock and OPEC has decided to increase production, which lowers the price of oil. What will happen to the price level and RGDP in the short run? Label the original point (A) and the new point after the shift as (B) b) Assume that the government in reaction assumes a Classical stance and does not introduce a policy shift. What happens to the economy in the long run according to Classical economists? Graph this shift and explain the process. c) However, you are a Keynesian economist and therefore prepare a critique of this Classical stance. What is the resulting change in prices and RGDP from this laissez-faire stance? Label this point as (C). What instead would you propose as a necessary policy shift? Why? Describe and graph each step.

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