Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. Use the AD-AS model to show the effects on output and the price level in both the short- run and long-run. Show the adjustment process of the economy from the short-run to the long-run. What is the effect on unemployment in short-run and long-run? Can policymakers do something to accommodate this shock? Would the outcome be different in this case?

Suppose that the oil price sharply increased for a while, which increased production costs, causing an adverse supply shock. Use the AD-AS model to show the effects on output and the price level in...

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

1. Use the AD-AS model to show the effects on output and the price level in both the short- run and long-run.
2. Show the adjustment process of the economy from the short-run to the long-run.
3. What is the effect on unemployment in short-run and long-run?
4. Can policymakers do something to accommodate this shock? Would the outcome be different in this case?

Jun 07, 2022