2. In recent months the ination rate has soared to levels close to 10% due to the combined effects of a strong increase in energy prices and supply-side bottlenecks. There are obvious parallels with the oil price shocks in the 70's. At the time, the policy response of many countries led to high and persistent levels of ination, followed by a severe recession. Policy makers have learned from the experience in the 70s, but the economic situation is completely different from the situation in the 70's. a. Use the AD/AS framework to analyse the impact of a persistent negative supply b. shock caused by a persistent rise in energy prices. Illustrate the adjustment process if the monetary and scal authorities do not inter- vene. Explain some of the factors that will determine the speed of adjustment. Some economists and politicians advocate a temporary reduction in tax rates to compensate households for the drop in their purchasing power. Explain the pros and cons of such a policy response. . Wage indexation is another option to compensate salaried workers for the loss of purchasing power. Use the concept of the expectations-adjusted Philips curve to show how wage indexation may cause a wage-price spiral after a negative supply shock. Why is a wage-price spiral particularly harmful for a member state of a monetary union like Spain. . A persistent increase in the ination rate above the 2% target will force the ECB to undertake actions. What measures could the ECB announce and how would they affect the Spanish economy? Given the risks outlined above, both the Government as the Bank of Spain argue in favor of a social pact [Pacto de Rentas). What elements should this pact contain if we wish to contain ination and guarantee a fair distribution of the losses due to the rise in energy prices