In Late November, OPEC agreed to cut oil production. For simplicity, assume OPEC is the only supplier of crude oil and no other alternatives are avaiable.
A. In a supply and demand diagram for the market for crude oil, show the effects on price and quantity of oil as a result of this policy.
B. Illustrate, with a diagram of the AS-AD model, the effects of OPEC's policy on output and the price level in United States in the short-run. Predict what would happen to unemployment.
C. If the Fed wants to return output to its long-rune level, what should it do? What is the major drawback of this policy?