A cartel is often an unstable relationship as individual members both seek and seize the opportunity to cheat on the agreement and improve their own position at the expense of others. Assume that the OPEC oil cartel becomes subject to this tension or conflict such that the cartel gives way to a more competitive oil market resulting in a dramatic decrease in the world oil price.

As a result Australia experiences a significant decline in the rate of inflation

Using the aggregate demand - aggregate supply framework, consider the likely response of the Australian economy in terms of the rate of inflation, the level of real GDP and the unemployment rate in both the short run and the long run.

Your answer should be in two parts considering first, the outcomes without the lower inflation rate causing a change in potential output and then secondly, allowing for such a change in potential output.

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