Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock.

A. Use the AD-AS model to show the effects on output and the price level in both the short-run and long-run.

B. Show the adjustment process of the economy from the short-run to the long-run.

C. What is the effect on unemployment in short-run and long-run?

D. Can policymakers do something to accommodate this shock? Would the outcome be different in this case?

Expert Solution

Rahul Sunny answered 2 years ago

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