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Q3: Aggregate Suppy and Demand (a) If oil prices increase, use the AS-AD model to show...

Q3: Aggregate Suppy and Demand

(a) If oil prices increase, use the AS-AD model to show how this increase in oil prices as an adverse supply shock. How would this affect, the price level? real GDP and unemployment.

(b) What is a policy response the Fed could do to help alleviate the adverse shock in part (a)? Graph how this response would work? What are the associated trade-offs of the policy given the model?

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