The U.S. economy is at full employment when the following events occur:

• A deep recession hits the world economy.

• The world oil price rises by a large amount.

• U.S. businesses expect future profits to fall.

1. Explain the effect of each event separately on aggregate demand and aggregate supply. How will real GDP and the price level change in the short run?

2. Explain the combined effect of these events on real GDP and the price level.

3. Which event, if any, brings stagflation?