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) (34 points total) You are asked to fill in the details on the graph below so that it shows the effect in the baseline
) (34 points total) You are asked to fill in the details on the graph below so that it shows the effect in the baseline aggregate supply/ aggregate demand model if there is a one-time shock to oil prices. Assume that the long-run real interest rate is 1%, the Fed has a long-run inflation target of 3%, and that the economy starts out in period 0 in long-run equilibrium. A.) (16 points) Label the variables that are being measured on the horizontal and vertical axis so that the graph would correspond to an AS-AD diagram. Show the initial position of the AS and AD curves before there is any change in oil prices, labeling these as "AS 0 " and "AD 0 ". Indicate on your graph the numerical values for the variables on the horizontal and vertical axis in the initial equilibrium. Write here ___________ the initial value for the nominal interest rate. B.) (8 points) Assume that in period 1 oil prices increase resulting in a one-time shock to in period 1 (assume this has no effect on or ) . Draw the AS and AD curves for period 1, labeling these as "AS
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