One potential benefit of global warming is the access to (unexploited) oil reserves in Antarctica. The expansion of oil production is likely to reduce the price of oil. Assume that the economy is initially in medium-run equilibrium and the central bank maintains a price target. If the world price of oil decreases significantly, use the IS-LM and AS-AD diagrams, what are the likely macroeconomic effects (in terms of the interest rate, output and prices) on Australia in the short and medium run? What government policy response would you recommend if i) the fall in oil price is deemed to be temporary and ii) the fall in oil price is deemed to be permanent?
The question belongs to Economics and it discusses about a scenario where oil prices decrease significantly in Australia and the government policy to respond to the situation.
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