After the initial shock of pandemic, the UK economy is experiencing another set ofeconomic challenges: shortages in fuel leading to price rises in fuel; shortages in transportworkers due to the consequences of Brexit; and large disruptions to supply chains that arepreventing the transportation of many essential products.

The Financial Times recently reported: "The UK's rate of inflation jumped to 10.1 per centin July, the first time it has registered a double-digit annual increase in more than fourdecades. Consumer price inflation, driven by higher food prices, rose from 9.4 per cent inJune to its highest level since February 1982."

Australia has recently signed on to a new trade deal with the UK, and the UK is one of thelargest sources of foreign investment for the Australian economy. This means it is inAustralia's interest for the UK economy to strengthen. visually illustrate the impact of these supply-side shocks on the UK economy using an AD-AS diagram (image below) . Your colleague has made a start on the diagram but is missing a lot of labels and essential information. For simplicity, assume that the UK economy was initially at Y*.

a) The Bank of England is trying to figure out the most appropriate monetary policy responsein this situation. Faced with these negative supply-side economic shocks, what 'doublyproblematic' macroeconomic concern do you need to alert them to?

b) Your colleagues at the Bank of England inform you that they are concerned aboutunemployment, but even more concerned about inflation. Based on this information,what monetary policy prescription would you recommend?

c) Building on the diagram illustrate (on the same diagram) what would happen to the UK economyif the Bank of England adopts your policy advice. Be sure to show the final effect on Output and Price Level, relative to your starting equilibrium.