Congratulations! You have been appointed an economic policy adviser to the United States. You are told that the economy is significantly below its potential output and that the following will happen next year: World income will fall significantly and the price of oil will rise significantly. (The United States is an oil importer.)
a. What will happen to the price level and output.' Using the AS/AD model, demonstrate your predictions graphically.
b. What policy might you suggest to the government?