a) Analyze the effects of a temporary increase in the price of oil (a temporary adverse price shock) on the current output, employment, the real wage, national saving, investment, and the real interest rate.

Because the supply shock is temporary assume that future MP of capital and future expected household incomes are unchanged. Assume that that output and employment remain at full employment levels.

(b) Now make the price shock permanent and analyze the effects current output, employment, the real wage, national saving, investment, and the real interest rate. Show that in the scenario, the real interest rate need not change.