(a) Assume a closed economy with flexible prices and wages. Using the AD-AS model, identify the impact of the following shocks in the short and in the long run. Explain the adjustment process between the short and the long run equilibrium.

(i) Due to increased uncertainty about returns on investment, firms scale back or defer their expansion plans.

(ii) Due to border closures, there is an increase in the logistical costs incurred by firms in the production process.

(b) With reference to each of the two shocks described in (a) above, identify and comment on possible policy responses if the government or the central bank wants to avoid short run fluctuations in output and the price level.

(c) Use the Phillips curve to analyse the short and long run impact on an economy when the government embarks on a program of fiscal expansion. Then explain how your answer would change if agents in the economy believe that the central bank is fully committed to maintaining stable inflation rates.