An economy was originally at the long-run macroeconomics equilibrium shown in the diagram below:

Due to a rise in fuel price, this economy is facingstagflationwhich is caused by aAnswer positive supplypositive demandnegative demandnegative supply shock.

As a result, the level ofreal GDPwillAnswer fallfluctuaterisestay the same while the level ofaggregate pricewillAnswer fallrisestay the samefluctuate.

In order to prevent high inflation, the Bank of England can mitigate the impact of stagflation by implementing aAnswer expansionarycontractionary monetary policyby increasingAnswer interest ratetaxesmoney supplygovernment spending.

This policy willshiftAnswer SRASLRASAD curve to theAnswer leftright leading toAnswer an increasea decrease inreal GDPandAnswer an increasea decrease inaggregate price.