A. Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this supply shock on output and prices. In other word how does the economy get back to long run? Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock, both in the short run and long run. What happens to unemployment rate in the short run and in the long run?

B. Suppose you are an economist working for the Federal Reserve and assuming that your top priority is maintaining full employment in the economy. how would you attempt to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased? State in words what happens to prices and output as a combined result of the supply shock and the recommended Federal

Reserve accommodation. That is, clearly show what the supply shock would do and how the Federal Reserve's policy would help the economy move to full employment equilibrium. Show this action in the graph and label the shifts. Which curve shifts? Does it shift to the right or left? What happens to output and prices as a result? What happens to unemployment rate? Explain fully.