A reduction in world oil supplies is likely to cause a reduction in aggregate supply, a...

A reduction in world oil supplies is likely to cause

		a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real Gross Domestic Product (GDP).
		an increase in aggregate demand and a decrease in the equilibrium price level.
		an increase in equilibrium price level and an increase in real Gross Domestic Product (GDP).
		a decrease in equilibrium price level and an increase in real Gross Domestic Product (GDP).

Expert Solution

Correct : a reduction in aggregate supply, a rise in the

Oil is used in the manufacturing of the goods and services. When world oil supply decreases, its price increases. Rise in price of oil increases cost of production. Higher the cost of production lower is the aggregate supply.

Thus aggregate supply decreases leading to decrease in real GDP and increase in price.

Rahul Sunny answered 2 years ago

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