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In: Economics

Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD)...

Consider a negative short-run aggregate supply shock hitting the economy using the Aggregate supply/aggregate demand (AS/AD) model.

a. Give two examples of such a shock and carefully explain its short-run effects and the underlying reasoning (do NOT provide a diagram).

b. Assuming policymakers ignore this shock, explain step by step what happens in the economy in the longer-term (do NOT provide a diagram).

c. How should the central bank and/or the government respond to this shock? Carefully explain (do NOT provide a diagram).

d. Now consider a different shock. Researchers find a cure for COVID-19 and all other diseases, so all people get healthier, retire at a later age and die at the age of 120. How would you capture this situation in the AS/AD model (with the economy starting in long-run equilibrium)? Explain the intuition and show your arguments in a diagram. (Note that there may not be one correct answer; this question is trying to make you think outside the box and we are looking at the quality of your arguments).

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